After reading the heading, you must be shocked or may be surprised. The very first question that must have striked your mind is – ‘ How inflation can be a tax?’ It may not be obvious that inflation can be viewed as a tax. After all, no one receives a bill for this tax. And if inflation is a tax, ” Who then pays the inflation tax? ”
Before coming to the answer, let’s just simply define what inflation and tax is. Inflation is the increase in prices that consumers will have to pay due to increase in the supply of money in the economy. Whereas, tax is compulsory contribution to state revenue as imposed by government on goods and services or transactions . So how can we relate these terms? In simple words we can say, the revenue raised by printing money is called INFLATION TAX and the holders of money pays the inflation tax.
Let’s take a simple example to understand this. If a consumer has to pay 50 bucks to buy a burger plus 10% tax, then in total he is paying 55 rupees to have the burger. Now suppose there is a inflation in the economy due to increase in money supply and prices of goods and services increases by 10% which means the value of money in the pockets of consumers have decreased by 10% . In order to have the same burger they will have pay 10% extra that is 60.5 rupees. This simply implies that inflation acts like a tax for the buyers.
Hence, Inflation in turn has numerous effects of its own on the ecomomy. And one of it includes the effect on the holders of money. When the government prints new money for its use, its makes the old money in the hands of the public less valuable. Thus, inflation is like a tax on holding money.