My City June 2022

MYECON

Inflation is a Tax BY DR. CHRISTOPHER DOUGLAS

taxes and a rate of in ation that causes prices to double. In each case, purchasing power falls by the same amount. Governments raise revenue to pay for their spending in three ways: taxes, borrowing, or in ation (e.g., printing money and spending it). Taxes have the drawback of being politically unpopular and have spawned various taxpayer re volts, such as the ones that resulted in Proposition 13 in Cal ifornia and the Headlee Amendment in Michigan (both in 1978) and have caused the defeat and recall of various elected o†cials over the years. Borrowing has the disadvantage of having to be repaid and can lead to a sovereign debt crisis if it is excessive, leading to a severe recession and civil unrest. Printing money is the path of least resistance. No politician must take a vote to raise taxes and the resulting in ation is blamed on someone else: COVID, supply chains and/or Vlad imir Putin. Note that in ation was already at 7.5% in January 2022, a month before the Russian-Ukrainian war began. —is year, in ation has already cost a household earning a $60,000 income $5,100 through higher prices. Just this year, all of one household member’s three COVID checks and half of another’s have been lost to in ation. Note that the government paid for these checks by printing money. Since in ation is a tax caused by the government cre ating money to pay for its spending, the only way in ation will fall is if spending and money creation are reduced. Until this happens, in ation will continue to be high and living standards will fall. ®

S uppose a President of the United States proposed raising taxes on everyone, rich and poor, by 8.5%. And suppose this would not be a one-time 8.5% tax increase; taxes would be increased by 8.5% every single year. Such a plan would be hard to take seriously, as the standard of living would quickly fall if taxes were increased by 8.5% every single year. Every year, the typical consumer would have 8.5% less income, meaning he/she would be able to purchase 8.5% fewer goods and services compared to the previous year. After just nine years of this plan, the typi cal consumer’s purchasing power and thus standard of living would have decreased by half.—is would hit the poorest the hardest, as low-income households cannot easily sacri¢ce 8.5% of their consumption every year. A rich household would have an easier time doing so, as they could cut back on luxury items before having to cut back on necessities. Clearly, no President concerned about his or his party’s political future would propose this. However, 8.5% in a tion (the rate as of this writing) is exactly such a plan.—e 8.5% in ation rate means that prices are rising by 8.5% every year. What cost $1 to purchase this year will cost $1.09 next year, $1.17 the following year, and $2.08 after nine years.—ere is no di¤erence, in terms of a household’s ability to purchase goods and services, between doubling

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Dr. Christopher Douglas came to the Univer sity of Michigan-Flint in 2006. He earned a B.S. in Electrical Engineering and a B.S. in Economics from Michigan Technological University in 2001, and his Ph.D. in Economics from Michigan State University in 2007. As

Associate Professor and Chair of the Department of Economics, he teaches Principles of Microeconomics, Principles of Macroeconomics, International Economics, Public Finance, and Sports Economics.

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