Inflation Tax

About Inflation Tax

Inflation acts as a hidden tax. When governments print money, the resulting inflation reduces the purchasing power of existing money. This effectively transfers wealth from money holders to the government. The inflation tax is also called seigniorage. During hyperinflation, the inflation tax becomes the primary source of government revenue. In Weimar Germany, Zimbabwe, and Venezuela, governments printed money to pay expenses, causing devastating hyperinflation. Even moderate inflation acts as a tax. At 3 percent annual inflation, the real value of cash holdings decreases by 3 percent per year. Inflation benefits debtors, including governments, at the expense of creditors and savers. Central bank independence from fiscal authorities is designed to prevent the inflation tax by separating monetary and fiscal policy.