Inflation is considered an "iniquitous tax" because it reduces people's purchasing power without their consent. Inflation is a sustained increase in prices over time that makes each currency unit worth less. This harms ordinary people like fixed-income workers the most as their salaries don't keep up with rising costs. While a small, stable rate of inflation can encourage production, high or unpredictable inflation disrupts economies and can even cause monetary systems to collapse. Inflation also acts as a hidden tax, reducing the real value of savings and income over time. To fairly account for loss of purchasing power, some economists argue incomes should be indexed and tax brackets adjusted for inflation levels each year.

1. Inflation - The most Iniquitous Tax
“Inflation is taxation without legislation.” – Milton Friedman
“Iniquitous” means grossly unfair and morally wrong.
In order to know how inflation directly and indirectly affects everyone, let’s know what it is
Inflation?
In economics, “Inflation” is a sustained increase in the general price level of goods and
services in an economy over a period of time. When the price level rises, each unit
of currency buys fewer goods and services. Consequently, inflation reflects a reduction in
the purchasing power per unit of money a loss of real value in the medium of exchange and unit
of account within the economy.
One of the constant things in the ever changing economic life is, the prices of things keeps on
rising, the price of daily used commodities are almost 180% higher than what they were during
mid 90’s. The reason of this constant change is the decrease in value of money. This decrease if
constant and as small as 2.3%, does not make much of a difference, in fact it is believed that a
small and constant decrease to the value of money causing increase in the price of a commodity
every year encourages the producers to produce and supply more in the market, but a sudden and
heavy fall to the value of money makes a serious economic turbulence. In the seventeenth
century the Spanish empire collapsed due to inflation without even knowing that it is actually
occurring which may be one of the reason why the economist now a days are so much obsessed
with keeping track of inflation and very focused of managing it, and by managing it means
pushing the increasing price in the heads of the ultimate consumers. It always happens that when
Inflation hits a country, no matter if it is cost pulled inflation or demand pulled inflation,
ordinary people such as fixed salary workers suffer the most, people who have saved their
income for future use with themselves gradually suffers due to the loss of value of money.
Talking about how ordinary people suffer due to inflation can be understood through a
simple ex: say a person’s income is increased Rs 4, 50,000 to Rs 5, 50,000 and has joined the 20
percent tax payable group .But since one has an incremental taxation system, the 20% tax will be
charged only on the income above 5, 00,000 which is just Rs 10,000 which is not much to worry
about. But what if the CPI increases by 10%? A considerably huge amount of money even after
such this increase in income gets chewed away just by inflation.
Seigniorage as Tax
Some economists regarded Seigniorage as a form of inflation tax, redistributing real resources to
the currency issuer. Issuing new currency, rather than collecting taxes paid out of the existing

2. money stock, is then considered in effect a tax that falls on those who hold the existing
currency. Inflation of the money supply in the long run may cause and, all other things being
equal will cause a general rise in prices due to the reduced purchasing power of the currency.
Indexing Income tax for Inflation
According to Milton Friedman the 1976 Nobel Memorial Prize winning American Economist
“Inflation is taxation without legislation.”
It is important to understand that inflation is, indirectly a tax increase causing a decrease
in purchasing power at the same rates because of an increase in nominal income or capital gain.
Explaining the concept through an example, let’s say a person bought a piece of land twenty
years back for Rs 5,00,000 wants to sell it at Rs 10,00,000, but this is accompanied by a decline
in monetary value by 50 percent, though the market value of the land is increased but the
intrinsic value is the same. Still, the tax department considers this eligible for tax. With inflation
affecting the purchasing power of an individual, is it justified that an increase in the income level
should be taxed the same way no matter how much of that is eaten up by inflation?
As we all know that a little percent of Inflation is good for economy which should be 3%
or we can say 0-3% which is good for economy, if it gets more than 3% than we the people of
the country should think about the negative impact of the inflation. If it gets high than 3% than
the economy of the country will be misbalance. As the current rate of inflation in India is 3.35%.
It is now under control compared to the past few years. The impacts of Inflation directly go on to
the middle class families as well as the daily wage earner and the fixed salaried person because
their earning is limited. The value of the money gets decreased which leads their purchasing
power to fall then compared to when there was no inflation.
Some of the impacts which affect the economy of the country as well as the people of the
country are:-
1. Commodities prices will rise by which the purchasing power of the consumer
decrease.
2. Salaried workers such as clerks, teachers, and other persons lose when there is
inflation. The reason is that their salaries are slow to adjust when prices are rising.
3. Inflation adversely affects the volume of production because the expectation of rising
prices along-with rising costs of inputs bring uncertainty. This reduces production.
4. Prices rise more rapidly in the home country than in foreign countries, it lowers the
exchange rate in relation to foreign currencies.
5. Hyperinflation persists and the value of money continues to fall many times in a day,
it ultimately leads to the collapse of the monetary system, as happened in Germany
after World War I.

3. 6. High interest rates because people would borrow more in order to fulfil their needs or
in future anticipation that price would further rise which would create a scarcity of
funds and a simple rule of economics the thing whose demand is more but supply is
less rises.
7. Currency devaluation, a country whose Inflation rate is high they get this problem
more often which results the value of the currency value have to decrease in the
international market.
8. Inflation hinders the inflow of foreign capital because the rising costs of materials and
other inputs make foreign investment less profitable.
Inflation affects the government in various ways. It helps the government in financing its
activities through inflationary finance. As the money incomes of the people increase, government
collects that in the form of taxes on incomes and commodities. So the revenues of the
government increase during rising prices. From the side of the producer’s side it is observed that
they hoard the stock to maximize the profit percentage when they see the rising prices of the
commodities, they create an artificial scarcity of the commodities in the market, then the
producers sell the stock in the black market which increases the price of the commodity that is
borne by the common people.
So, we can say that inflation directly or indirectly has the impact on the economy of the country
as well as the common people. It is an indirect tax which is paid by the common people due to
this inflation. Taxpaying directly doesn’t mean that there is inflation but the rise in price of
commodity or we can say the value of the currency which is decreasing day by day is the most
significant indirectly tax paid by the common people of the country. It is not known to everyone
but it is affecting the economy and the common people a lot.
Finally we can say that “Inflation – The most Iniquitous Tax that is paid unknowingly is a
big threat to upcoming years for the country as well as for the people of the country.
Written by,
Rajdeep Ghosh