Inflation Tax


Ajit Kumar AJIT KUMARWISDOM IAS, New Delhi.

Inflation tax is not an actual legal tax paid to a government; instead "inflation tax" refers to the penalty for holding cash at a time of high inflation. When the government prints more money or reduces interest rates, it floods the market with cash, which raises inflation in the long run. If an investor is holding securities, real estate or other assets, the effect of inflation may be negligible. If a person is holding cash, though, this cash is worth less after inflation has risen. The degree of decrease in the value of cash is termed the inflation tax for the way it punishes people who hold assets in cash.

This is a situation of sustaining government expenditure at the cost of people’s income. This looks as if inflation is working as a tax. That is how the term inflation tax is also known as seignorage. It means, inflation is always the level to which the government may go for deficit financing—level of deficit financing is directly reflected by the rate of inflation. It could also be used by the governments in the form of prices and incomes policy under which the companies pay inflation tax on the salary increases above the set level prescribed by the
government.



Friday, 23rd Sep 2016, 11:27:12 AM

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Anusha
Would u plz elaborate on "it could also be used by the governments in the form of prices and incomes policy under which the companies pay inflation tax on the salary increases above the set level prescribed by the government"......
Jul 18, 2018 09:38 AM
Udit singh
Just copied and pasted from ramesh singh
Oct 20, 2018 01:19 PM