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Inflation tax Ethical or Economic question?
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Inflation tax Ethical or Economic question?
Despite the regressive consumption of non-linear tax due to inflation, it also leads to a countries loss of purchasing power. Most people without the knowledge of money, economy dynamics and exchange rates argue that when the government prints more money to cater for its increased demand instead of raising the taxes or borrowing is advantageous. Being aware that the practice causes an erosion of the value of funding – inflation tax – that is a burden to cash holders. Both rich and the poor are effect by such inflation. The question of who takes the lion’s share of the responsibility arise. As my friend argues, most people think the poor stand to lose when such taxes result, which is not the case, the rich stand to gain from it.
Tax due to inflation is more of a wealth transfer than a tax. Some of the investments stand to gain while other money users dig deeper to cater for the increase. Holders of some of the equities, hard assets and the debtors stand to gain from the increase. The owner of the above is the rich who can afford to be debtors and own hard assets. The wealth is unlikely to rely on fixed income, as they are not employees. The group of people who suffer most is the employed – those who rely on a fixed rate of revenue – and the poor who despite of inflated prices the sources of income remain constant (Erosa & Ventura 2002). In reality, both the rich and the poor purchase the same goods, live in houses, share their basic needs but the levels of income are different.

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The reduction in the purchasing power for the rich will still allow them to save and purchase since they have a higher ability to save. The proportion of income affected by the inflation (meant for spending) is what makes the difference. Though the rich and the poor may pay an equal amount of revenue for purchasing, inflation will be higher for the person with little to spend.
Inflation tax reduces the purchasing power of an individual. An income tax is a burden to any citizen earning wages or salaries. The two types of taxes apply to the same person, with the inflation tax adding on the income tax. The result is an automatic heavier burden to the taxpayer, which leads to a reduction in savings or incapability of purchasing. As a consequence, of the reduced savings, the poor, and the working class has fewer savings, affecting their power to invest and blocking their way to evade poverty.
Being wealthy or not wealthy is an element with many determining factors. The definition of being wealthy in this context need to be specific but on monetary terms, the wealthy have possession both material and money. A wealthy person is credible for loans, which make it possible for them to grow more prosperous since they can generate more income. In this category, most of the people are investors and owners of businesses. On the contrast, poor and middle-class citizens are not wealthy are more likely to be employees and the unemployed. Persons in this category have the income-expenditure ratio very high and very low savings. With more reduction of the small saving by increased inflation tax, these people become handicapped to save and reduce their chances of being investors or business owners.
Inflation absorbed by the consumers result from the manufacturers’ rise of prices. The increase in prices cater for inflation cost to keep the profits on the usual margin meaning no loss for the owners of the company. An increase in the prices of goods and services require a counter by a rise in the income for the employed to bridge the gap and obtain balance. The loans and mortgages by the middle class and the poor continue appreciating due to the increased rates of inflation. The increase may sometimes come after years of inflation and exploitation, and more likely at a lower scale than the inflation rate. Since the rich get their standardized income from the companies, Treasury bonds, and equities, their ratio of revenue to expenditure remain even with inflation. The system of the flow of income is hardly broken. The rich are the policy makers; thus, the rule will always work in favor of the wealthy (Afonso, Schuknecht & Tanzi 2010).
In my point of view, inflation is not a good policy for implementation by any government. Due to its uneven distributed load that is more oppressive to the poor. Adoption of policies that favor the spending of the poor that are more taxation or increased government borrowing should be the alternatives for the rise in income by the government. The question is more ethical than economic as portrayed by my friends reasoning. Lack of information on money dynamics by the poor is a contributing factor to the money flow from the poor to the rich. The rich continue to be rich since they have information on the economy dynamics and know the art of investing.

ReferenceAfonso, A., Schuknecht, L., & Tanzi, V. (2010). Income distribution determinants and public spending efficiency. The Journal of Economic Inequality, 8(3), 367-389.
Erosa, A., & Ventura, G. (2002). On inflation as a regressive consumption tax. Journal of Monetary Economics, 49(4), 761-795.

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