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ECN 151 Mod 6 P1

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ECN 151 Mod 6 P1

The concept of inflation tax can be misunderstood by people to imply that it punishes the rich more than the poor. It may be presumed that since the rich have money, they hold them as cash. However, there are other underlying factors that contravene this assertion. In this paper, various aspects relating to effects of inflation tax on the poor, as well as various misconceptions relating to holding of money are clarified.

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On the one hand, the poor hold more money than the rich. These people spend a greater percentage of their cash immediately, thereby holding less money. On the other hand, the rich do not have an urgent need to spend their cash. As a result, they save and invest it. Investments can be in a form of houses, equity, and stocks, thereby generating money. The money generates wealth since it is not immediately spent (Comley, 2013). In addition, the poor are less flexible in the way they spend their money. Commodities such as food and energy comprise a high proportion of expenditures for the poor compared to the rich. A rise in prices of these commodities implies that very little cash can be saved by the poor. Conversely, the rich are usually affected by prices of manufactured products. Prices of these commodities tend to rise at a slower rate than the ones of household products.

The rich do not hold a large percentage of their income as money. The rich do not have an immediate need for their money. Hence, they invest their money through assets. The rich also have starling saving habits. On the contrary, the poor spend most of their income on buying basic commodities such as food. Therefore, their money is usually kept within their reach. In addition, the poor do not have other financial assets, thereby having a small amountof money that they can save or invest. The inflation tax, therefore, may affect the poor more than the rich (Friedman, 1979).

Income tax can be defined as a levy enforced by the government on individual’s financial income who operates within its jurisdiction. The law demands that businesses and individuals should submit their income tax returns annually to determine whether persons owe any taxes to the government or deserve a tax refund. Inflation tax places a huge burden on the poor compared to the rich. This is because they hold a higher percentage of their income in the form of cash. Consequently, the poor have a possibility to receive newly created cash before inflated prices in the market stabilize. The poor, therefore, suffer from direct consequences of inflated prices (Comley, 2013).

The poor also suffer more from the inflation tax since their income, pensions, and wages are static with no other source of investment. Thus, the poor have no means of eloping from the effects of inflation, which can be done by relocating assets to overseas. At the same time, the rich preserve their income in interest-bearing, inflation-adjusted assets. In fact, some of their properties add value instead of losing it. However, income tax is mostly imposed proportionately. This implies that the higher salary one gets, the higher taxes are imposed on his or her income. Consequently, low-earning persons are taxed less. It can, therefore, be noted that inflation tax punishes people holding money, which are the poor. Conversely, though income tax isnot recommended for low-paid workers, it is taxed proportionately (Friedman, 1979).

Inflation taxes may also affect the country negatively since they also exert pressure on the middle-class populatiion in a given country. The consequence is that the productivity of these people decreases. The level of savings and investment also decreases. The other effect also relates to  effects on inflation-indexed bonds. The bonds are usually designed to limit the inflation risk. Payment of the bonds is therefore dependent on payment of taxes. Consequently, the bonds may be paid poorly, thereby posing a risk to the concerned parties. Inflation tax may also affect nominal interest rates. It occurs when the inflation tax is levied on taxes and income. The tax decreases the amount of real interest in the bonds. There are also times when inflation tax is extended to non- monitory assets, as well as money intended to gain interest. Real interest decreases significantly since the money bears inflation tax, as well as tax on the inflation (Friedman, 1979).

The individual is responsible for either becoming rich or poor. Financial stability can only be achieved by one having sound understanding of the finances, as well making effective lifestyle choices. The first thing relates to making investments in various areas such as stocks and the real estate. Investments help a person to make passive money and acquire other sources of revenue. Wealthy people also start saving and investing early. The saved amount accumulates to thousands and billions of cents as time progresses. The wealthy also work extra hours as a matter of sacrifice and dedication to their work (Comley, 2013). It is also necessary to utilize the money on right projects that matter to the individual. However, it should be noted that there are people who have acquired wealth through inheritance though they are few. Few political classes can also be classified as wealthy. Therefore, much of wealth can be attributed to individuals’ efforts.

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