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Abolish the Inflation Tax on the Poor & Middle Class

46 Pages Posted: 9 Nov 2011 Last revised: 10 Nov 2011

John Thomas Plecnik

Cleveland State University - Cleveland-Marshall College of Law

Date Written: November 8, 2011

Abstract

Inflation erodes the purchasing power of money and distorts some income tax liabilities upward, which in turn discourages savings and investment. When inflation is caused by the central bank “printing” money to fund deficit spending, it results in a transfer of real wealth from the holders of dollars or assets denominated in dollars to the government and, in normative terms, may be conceptualized as a tax. The effect of the so-called inflation tax is regressive, because low-income taxpayers often lack the sophistication or liquidity to invest in hedges against inflation.

Following the double-digit inflation of the late 1970s and early 1980s, the U.S. Treasury Department and a host of legal scholars proposed sweeping reforms to comprehensively index the Internal Revenue Code for inflation. However, their proposals were never enacted into law. Instead, Congress chose to respond to inflation on a case-by-case basis. Many of those responses, such as the preferential rate for capital gains, afford relief to the wealthy, but do little to help the poor and middle class. To counter the pernicious effects of inflation and make the Code more equitable, this article proposes an inflation tax credit. Under the proposal, low-income taxpayers may elect between (i) substantiating the average balance of their bank deposits and treasury bills to receive a credit based on that balance, and (ii) taking a standard credit based on their gross income.

Keywords: inflation, inflation rate, hyperinflation, double-digit inflation, tax, income tax, inflation and the income tax, inflation tax, seigniorage, inflation tax credit, ITC, refundable tax credit, deduction, standard deduction, earned income tax credit, EITC, taxpayer, low-income taxpayer, poor

Suggested Citation

Plecnik, John Thomas, Abolish the Inflation Tax on the Poor & Middle Class (November 8, 2011). Quinnipiac Law Review, Vol. 29, p. 925, 2011; Cleveland-Marshall Legal Studies Paper No. 11-234. Available at SSRN: https://ssrn.com/abstract=1956692

John Thomas Plecnik (Contact Author)

Cleveland State University - Cleveland-Marshall College of Law ( email )

2121 Euclid Avenue, LB 138
Cleveland, OH 44115-2214
United States

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