This study, "Essays on the Inflation Tax," is three related, but independent papers. They are united by the central theme that inflation is a tax on the purchasing power of money. As a tax, inflation should be analyzed for its efficiency and equity. The former is the sole topic of this study. The contribution to economic theory is essentially one of synthesis. The thesis endeavors to integrate hypotheses and concepts from monetary theory, the economics of information and uncertainty, capital market theory, welfare economics and public finance, especially tax incidence theory, regarding market behavior and inflation. The core issue in this synthesis is whether the inflation tax is a neutral tax.
The inflation tax is efficient, or neutral, if no product substitutions arise from its imposition. It is shown that the inflation tax is not neutral. The tax is inefficient because even in an idealized economy, real resources will be consumed in attempts to avoid or shift the burden of the tax. There are four primary determinants to the magnitude of the inefficiency of the tax: (1)the size of the direct burden of the tax, (2)the accuracy and pervasiveness of expectations, (3)the uncertainty about future inflation, and (4)institutional rigidities and market imperfections associated with economic behavior which is restricted to responses to nominal prices. The incidence of the tax can be identified only when all market responses caused by an exogenous change in the tax are analyzed and measured simultaneously. The global burden of the inflationary tax is equal to its direct burden if and only if the cost of the tax in any single market is strictly independent of the cost of the tax in all other markets. This condition also describes tax neutrality.
The concept of "neutral money" has a long standing place in economic theory. It has recently received renewed attention because of its close association with the concept of rational expectations. Simply stated, changes in the money supply which are anticipated "rationally" cause no real effects. Now, if inflation is assumed to be caused solely by changes in the money supply, it follows that rationally anticipated inflation has no real (substitution) effects.
But the inflation tax is not neutral. Herein lies a serious conceptual conflict. This text is a study and resolution of this conflict.
If the inflation tax is endogenous, the expected inflation rate and real market quantities are jointly and simultaneously determined. An endogenous inflation tax is "neutral" in that it has no causal connection with real behavior. This is the interpretation of the Fisherian Hypothesis, which states that the nominal rate of interest is equal to the real rate of interest plus the expected future inflation rate. However, an endogenous inflation tax may have caused a loss in social welfare greater than the inflation tax revenues, i.e., excess burden which implies non-neutrality. Hence, the inflation tax can at one moment be non-neutral (exogenous), and yet at a later moment it can be neutral, or more accurately "endogenous".
The three essays which comprise this work examine this issue of the neutrality-endogeneity of the inflation tax by critically evaluating existing theories and hypotheses about the costs and effects of inflation. In general, it is shown that most of these are either seriously flawed or simply erroneous.
| Identifer | oai:union.ndltd.org:RICE/oai:scholarship.rice.edu:1911/15610 |
| Date | January 1981 |
| Creators | DYER, JAMES CARROL, IV |
| Source Sets | Rice University |
| Language | English |
| Detected Language | English |
| Type | Thesis, Text |
| Format | application/pdf |
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