Assignment
HOW GOVERNMENT PROFITS FROM INFLATION
The most important problem facing this country today, according to the latest Gallup Poll, is inflation. Fifty-four percent of the respondents named inflation and the high cost of living as their chief concerns while 18 percent named unemployment and eight percent named energy. This being the case, a good many of the leading figures in the Carter Administration (including the President himself) have devoted much of their time to "jawboning" in an effort to keep inflation down. In doing so, they have chastised the labor unions, businessmen, farmers, foreign oil producers--just about everybody. And yet many economists (including this one) are convinced that the chief villain is government itself. I would argue, in fact, that the federal government has a large vested interest in inflation and that it profits from it to a major degree.
THE GOVERNMENT'S VESTED INTEREST IN INFLATION
Economist Milton Friedman (in Essays on Inflation and Indexation) has pointed out that government directly "profits" from inflation in three ways. First, the additional government-created money will pay debts and finance expenditures over and above what the government collects in revenue. Secondly, government-induced inflation pushes taxpayers into higher income brackets and thus leads to taxpayers paying unlegislated tax increases. According to the congressional Joint Committee on Internal Revenue Taxation, the real income tax increase in 1974 caused by inflation totaled $7,122,000,000-a percentage increase of 5.9 for the average taxpayer. Since these statistics were compiled, the situation has become even worse. In 1953, the average family income was $5,000 and 11.8 percent of that was paid in direct taxes of all kinds-federal, state and local; according to the Advisory Commission on Intergovernmental Relations, the average family income in 1975 had risen to $14,000, but that family was paying 22.7 percent of its income in taxes-almost twice the amount paid two decades earlier. If we assume an annual inflation rate of six percent (a conservative assumption in a year when inflation is approaching the double-digit level), inflation-induced tax increases could net the federal government an additional unlegislated bonanza of $50 billion by 1980.1 Thirdly, the real amount of the national debt is reduced since the money had been borrowed at a time when the inflation rate was lower and money was worth more. Taking all these factors into account, Friedman estimates that the federal government's revenue from inflation came to more than $25 billion in 1973 alone. Given these facts and figures, it will come as no surprise if the enthusiasm of at least many government officials for fighting inflation is less than all consuming.
DISCUSSION
1. Many economists would quibble with Butler's usage of "government-created money" since it is the Federal Reserve System that actually "creates" money (for more on this topic, see Chapter 11), but most economists agree with Butler about the impact of inflation on taxpayers' income taxes. Do you agree with the majority? Why?
2. What sort of steps can an individual take to offset this inflation-taxation interrelationship? Short of stopping inflation itself, what can the government do?
3. Butler refers to the concept of tax indexing only in passing. What is it? Do you think it will work?
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.