The Return of the Inflation Tax

[ZenGum]

Systems that allow for bracket creep are common around the world. Treasurers love it because of the steady growth in tax revenue, other pollies love it because they can give occasional "tax breaks" by resetting the brackets a bit.
I am in favour of progressive tax rates.

I did want to respond to this from Redux:

And NEVER in our lifetime (or as long as economic stats have been recorded) have we had 10 consecutive years of a 4% annual inflation rate.

That may be right, but you've also never seen a US government debt in the 10+ trillion dollar range either. That will almost certainly cause inflation. Averaging 4% for the next decade is not an unreasonable assumption. Why do you think the price of gold is at an all time high?

Originally Posted by ZenGum

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That may be right, but you've also never seen a US government debt in the 10+ trillion dollar range either. That will almost certainly cause inflation. Averaging 4% for the next decade is not an unreasonable assumption. Why do you think the price of gold is at an all time high?

I agree that a $10+ trillion debt and potentially doubling the debt over the next 10 years (IMO, unlikely), as we did over the last eights years, is unsustainable in the longer term. At the same time, during the last 10 years, the price of gold has more than tripled (quadrupled?), with no inflationary impact.

But its not potentially inflationary unless the dollar is devalued much more significantly that it has been in the last few years. Could that happen? Sure, if the Fed floods the economy with "cheap" dollars. But, that is not likely.

A high rate of inflation occurs most often during a vibrant economy, at full production and with low unemployment, when demand outstrips supply. When the economy is strong, companies pay higher wages, which enables employees to spend more, which causes other companies to raise prices, etc....and you have a wage/price inflationary spiral. I know that is a little simplistic, but we are nowhere near that scenario.

While most economic measures would suggest that we are out of the recession of the last two years, the economy is hardly at full production or full employment. Wages arent rising, prices arent rising and there is no such spiral on the horizon.

Or, inflation could rise at a significantly higher rate if we were hit with a sudden, unpredictable and long-term scenario like a major oil embargo, similar to that which was primarily responsible for the inflation of the mid 70s....but I dont think it is reasonable to assume that will happen.

Studies by the Fed and others would suggest that the inflation rate will remain low (well below 4% - it is now still hovering at around 0%), at least over the next 2-5 years while the economy continues to recover and grow at modest (3-5%) GDP annual percentage increases....beyond that, it is more guesswork, but 10 years of 4% annual inflationary increases? IMO, it is disingenuous and dishonest to use that scenario to make a case against so-called inflation taxes.

I havent seen any credible study that would suggest such a scenario, but if you know of any such studies, I'll give it a look.