Causes and Consequences of Inflation

• Author: Amadeus Gabriel,Philipp Bagus,David Howden
• Published date: 01 December 2014
• Date: 01 December 2014
• DOI: http://doi.org/10.1111/basr.12043

Causes and Consequences

of Inflation1

PHILIPP BAGUS, DAVID HOWDEN, AND AMADEUS GABRIEL

ABSTRACT

While ethical implications of direct taxation systems have

recently received renewed attention, a more veiled scheme

remains unnoticed: inflation. We overview the causes of

inflation and assess its consequences. Salient wealth

redistributions are a defining feature of inflation, as

savers and fixed income individuals see a relative wealth

reduction. While avoiding this “tax” is difficult in many

instances because of the primacy of money in a monetary

economy, the tax codes of most developed countries allow

avoidance techniques to be employed. We analyze three

ways that inflation may be avoided in an attempt to pre-

serve personal wealth, as well as the consequences of

such practices.

INTRODUCTION

Much recent literature focuses on the ethics of direct

taxation (Bagus et al. 2011; McGee 2012c; Slemrod

2007). Whether income and consumption taxes are

imposed coercively on both consumers and producers has long

Philipp Bagus is an Associate Professor of the Economics Department, Universidad Rey Juan

Carlos, Madrid, Spain. E-mail: philipp.bagus@urjc.es. David Howden is a Professor of

Economics, St. Louis University, Madrid, Spain. E-mail: dhowden@slu.edu. Amadeus Gabriel

is an Assistant Professor in the Department of Finance and Economics, La Rochelle Business

School, La Rochelle, France. E-mail: gabriela@esc-larochelle.fr.

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Business and Society Review 119:4 497–517

© 2014 Center for Business Ethics at Bentley University. Published by Wiley Periodicals, Inc.,

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been contested. This being as it may, taxes can be, and often are,

remitted to the government voluntarily as if they were not reliant

on their coercive imposition. In this case, we are led to believe

that there is no difference between taxation and voluntarily dona-

tions of money to the government—both will result in spending

that is consistent with taxpayers’ desires. The curiosity that arises

is that if people did donate money voluntarily to the government,

neither coercion nor taxation would be necessary. This has led

some to deem taxation as an inefficient and involuntary disruptor

of the process of economic calculation (Bagus et al. 2011).2

While effects from the system of direct taxation have been

adequately addressed, there is a more obscure, if ubiquitous, form

of taxation affecting all market participants. Inflation—the loss of

purchasing power savers suffer from as a result of inflationary

monetary policies—is another means of government finance. The

government acquires resources in both cases of taxation. Under

direct taxation schemes, the government acquires money from the

public directly. Through inflation, the government uses its mono-

poly on the supply of money to create new money or to receive

newly created money from a legally privileged banking system.3The

government can buy resources from the public with the new

money, thus bidding up prices and imposing an implicit cost on the

public. Resources are transferred from the public to the govern-

ment in a similar manner as direct taxation.4In both cases, the

public has command over fewer resources and the government over

more.

This article sheds light on the role of inflation in government

finance and the effects thereof. It starts by looking at the causes

of inflation, specifically focusing on its use as a form of taxation.

The effects of inflation—both economic and ethical—will be out-

lined, along with corresponding methods to evade or avoid these

results. Finally, we will assess some legal implications of avoiding

inflation and conclude with a look at the benefits and costs that

accrue to individuals who do so.

INFLATION—VEILED AND COSTLY

Although inflation has a storied history among economists, focus

on its legitimacy has been insignificant (Bagus et al. 2011; Balac

498 BUSINESS AND SOCIETY REVIEW