A taxing mistake
Suppose a charismatic new sports pundit shows up with blockbuster findings about a decades-long pattern of wins and losses of all National Football League teams. This pundit complains that fans ignore the big picture — a picture that, according to this pundit, shows a disturbing trend of some teams winning disproportionately large numbers of Super Bowls while other teams seldom make it even to the divisional playoffs.
The clear implication of this pundit's findings is that the game is rigged by a few greedy franchises. And something should be done about it.
How seriously do you take this pundit? You don't want to dismiss him out of hand; he might have indeed discovered a significant flaw in the way NFL games are scheduled or played. But because the NFL is an amazing success story, you're naturally skeptical of his findings.
Exploring the pundit's argument more deeply, you discover that he blames the alleged problem on rule changes that give some quarterbacks an unfair advantage at catching touchdown passes.
The moment you read this pundit's explanation you realize his knowledge of football is scant. Someone who thinks quarterbacks catch touchdown passes is not to be trusted as a football analyst.
I developed a similar distrust of French economist Thomas Piketty's warning of growing economic inequality when I read, in his book “Capital in the Twenty-First Century,” his analysis of public debt.
Piketty argues that public debt is beneficial only if inflation causes government's creditors to be repaid in money that is worth much less than the money that the creditors originally lent to government. He writes that inflation “allowed deficits to be financed by those who lent money to the state, and taxes did not have to be raised by an equivalent amount.”
This claim is astonishingly poor economics.
It's simply untrue that when government repays its creditors with money devalued by inflation, taxes aren't raised. Taxes are raised. But in this case the burden of the higher taxes falls disproportionately and unfairly on government's creditors.
Creditors voluntarily lend money to borrowers on the promise and expectation of being repaid a sum of money — principal plus interest — that is worth more than what they lend. Yet when government inflates the money supply after borrowing money and then repays its creditors in money units worth less than what creditors expected to receive as repayment, the government effectively taxes these creditors. Government got the spending power to conduct its operations by borrowing it from creditors and inflation allows government to repay creditors an amount of spending power that is less than what was initially promised as repayment.
The fact that government got this spending power without formally raising taxes does nothing to render this transfer of resources to the government something other than a tax. Taxes are forced transfers of resources from private individuals and firms to the state. Unanticipated inflation results in just such a transfer: The government wrests control of resources from creditors who expected — and were (falsely) promised — that those resources plus interest would be returned to them in the future. The only difference is that this tax is hidden and unannounced — and, hence, especially pernicious.
Donald J. Boudreaux is a professor of economics and Getchell Chair at George Mason University in Fairfax, Va. His column appears twice monthly.
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