The inflation or the inflation tax represents the damage suffered by holders of cash resources and their equivalents, as a result of the currency denomination, caused by expansionary monetary policy. This is a hidden tax that decreases the value of those assets.
Many economists believe that the inflation tax affects mostly the lower and middle classes than the rich people, since they hold the majority of their income in cash, also they will receive the newly printed money once the market has already adapted to the increase prices. Besides, the incomes of the lower classes in society are fixed – both salaries and pensions.
How does it come?
When the Central bank prints money or gives credit, it increases the money in the economy. This is sometimes a reaction to the deteriorating economic conditions. It is assumed that in the long run, the increase of the money supply causes inflation. In fact, the increase of the money supply is a form of taxation, after the state finances government spending by money printing.
States are almost always net debtors. Inflation reduces the value of their duties, as in the same time increases the tax revenue. Thus, the state can improve debt-income ratio by taking inflationary policies.
However, if the government continues to sell debt, borrowing money as a compensation of debt securities, these securities will be affected by inflation. They will lose their value, and will therefore be less attractive to creditors, until the government could not find any at all.
The inflation tax is not required to include the issue of debt securities. By simple money printing the state can increase its liquidity and create inflationary pressures. Taxes on consumption and the incomes will bring more revenue to the Treasury. However, inflation usually creates social problems, when the benefits lag behind the rise in prices.