Inflation is government’s best friend

In the middle of the week of the DNC convention, we are back to square one in the race for the national presidential election. The economy is in limbo, just emerging from alleged Covid-induced overspending and a 22% inflation spiral that has created a dichotomy between those who benefit – investors in some asset classes – and those who pay the price – consumers. But who really benefits most from inflation – THE GOVERNMENT!

Let us never forget what Milton Friedman said: “Inflation is always caused by too much money chasing too few goods and services.” Let us also never forget that inflation causes prices to rise, not the other way around. Kamila and her Keynesian sycophants – and, might I add, a few too many Republicans – do not seem to understand these basic economic truths.

In an article in Economic Help by Tejan Pettinger, inflation makes it easier for governments to repay debt:

“There are several reasons why inflation makes it easier for a government to pay off its debts, especially when inflation is higher than expected. In summary:

Higher inflation increases nominal tax revenues (when prices are higher, the government collects more VAT and excise taxes and workers pay more income tax)
Higher inflation reduces the real value of debt, holders of fixed-rate bonds see a decline in the real value of their bonds, and it becomes easier for the government to repay those bonds.
Higher inflation can allow the government to freeze income tax thresholds so that more workers pay higher taxes – it becomes a way to increase tax revenues without raising tax rates.”
Let’s take a closer look at what is happening in the government bond markets:

The bondholders are the losers. On a $1,000 bond, the government still only has to pay back $1,000. But inflation has reduced the value of that $1,000 bond (the real value is now $900).

Since the inflation rate (10%) is higher than the interest rate (2%) of the bond, the bondholder loses 8% of the real value of his investment.

Because of inflation, only a smaller percentage of total government tax revenue is required to repay bondholders, making it easier for the government to repay the debt it originally took on.

The government (borrowers) is better off; bondholders (savers) are worse off as a result of inflation.

The same calculation regarding inflated property values is at play as homeowners – especially seniors on fixed incomes – are being priced out of their homes at inflated values. Our state should consider a hybrid “mark-to-sale” model as soon as possible rather than taxing homeowners on a portion of their wealth that they have not yet spent.

In Idaho, we are on the verge of a discussion about eliminating the grocery tax, lowering the state sales tax, increasing grocery tax credits for certain groups of people and families, or most likely some combination of these ideas.

If groceries cost 20% more, a $5 box of cereal now costs $6. Before, you would have paid 30 cents in taxes, now you pay 36 cents in taxes. You pay 20% more for the cereal and 20% more in taxes. The government takes 6 cents more out of your pocket for a box of cereal sold in this example – because the tax is a percentage and is now applied to a higher selling price. If your wages did not increase by 20%, you would lose. Unless the tax is reduced or eliminated entirely, the government is the winner in this transaction.

We must not forget that government revenues benefit from inflation, which is becoming an ever greater burden for citizens – at least for those who pay taxes.

Any discussion of tax reform – whether for sales, food, income, or property – should be conducted with the understanding that the government always faces headwinds in tax collection under conditions of inflation. And let us hope that our legislative leaders believe that their first duty is to the people (the voters, the electors) and not to the government agencies they are supposed to regulate and oversee.

Inflation over the last four years is the main reason for tax reform in this legislative period.