Explain the concept of an inflation tax to a friend

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Suppose you explain the concept of an inflation tax to a friend. You correctly tell them, "When a government prints money to cover its expenditures instead of taxing and borrowing, it causes inflation. An inflation tax is simply the erosion of the value of money from this inflation. Therefore, the burden of the tax lands on those who hold money." Your friend responds, "What's so bad about that? Rich people have all the money, so an inflation tax seems fair to me. Maybe the government should finance all of its expenditures by printing money."

• Is it true that rich people hold more money than poor people do?

• Do rich people hold a higher percent of their income as money than poor people?

• Compared to an income tax, does an inflation tax place a greater or lesser burden on the poor? Explain.

• Are there any other reasons why engaging in an inflation tax is not a good policy?

• Who is responsible for who is wealthy and who is not wealthy in this country and why?

• How does money flow from the less fortunate to the more fortunate? Is the system broken? Explain

Reference no: EM13997386

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