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Home / Corporate / Audit & Taxation / Civilized Inflation

Civilized Inflation

Money. To some, it is a means of exploitation and injustice, but no one can deny that it is a product of civilization and economic cooperation. Some time ago, I described the devastating effects of  a rapid devaluation of money (hyperinflation) on society [1]. However, a medium inflation rate constitutes a form of creeping expropriation as well, intransparent and undemocratic . In this article, I analyze how inflation contributes to rising levels of inequality and present the concept of the current “pop star” of economics, Thomas Piketty, to solve this problem.

How does Inflation cause inequality to rise?
We can observe that inflation hits lower and middle classes harder than the richest members of society. The way capitalism works is that blue and white collar workers are in a constant struggle with their employers about how to distribute the profits of  private enterprises. As wages are nominally fixed, they have to negotiate frequent wage raises just to maintain their level of real wages. If inflation rates are high, this creates great pressure, making it impossible for them to profit from increases in productivity, unlike the owners of capital.
It can also be observed that the richer members of society own a large percentage of the real estate. The middle class, however, is much more likely to put their savings in the banks, which constantly loses value, if interest rates are lower than inflation [2].

If Inflation is so bad, what is it good for anyway?
Directly or indirectly, governments are in charge of the inflation rate. Because debt is usually nominally fixed, it gets devalued according to the inflation rate, which suits the debtor. As almost every country in the world is indebted, they have the means to enrich themselves (lower their debt) by jacking up inflation rates.
Many people argue that the common currency within the Euro Zone is what blocks the economic recovery of the highly indebted southern European states. Rising inflation rates would make the economies of the PIGS-States (Portugal, Italy, Greece, Spain) more competitive on the world market, they would free the state of its debt and allow it to invest in its economy. Nevertheless, as said above, inflation causes inequality to rise, which in turn lowers economic growth and overall happiness [3]. Hence, the question arises:

Can we have the advantages of inflation without its disadvantages?
The current “pop star” of economics, French Thomas Piketty, says we can [4]. He proposes to replace inflation with a progressive wealth tax. Such a tax would constitute a permanent transfer of wealth from the citizens to the state, much in the way inflation does. However, he calls it a “civilized form of inflation”, because it has many advantages compared to inflation.

1. It is much easier to control the effects of a tax than of inflation. The European Central Bank, for example, equipped with excellent personnel and knowledge, currently desperately tries to raise  inflation with no success.

2. A tax can be subject to democratic control, whereas the decisions about inflation are made by technocrats in the back rooms of central banks.

3. Such a progressive tax, has a larger effect on the wealthy than on lower and middle classes. Hence, it could be used as a means to maintain or even lower levels of inequality.

What other advantages does a progressive wealth tax have?
Again, let me stress again that the design of the tax has to be a according to the will of the people. To me, this democratic element is an even bigger advantage of the tax over inflation than the inequality-argument. Social democrats like me might let the tax start at 500.00 € and reach 100% at everything above 5 million. I don’t see why anybody should possess more than 5.000.000 €, but that is debatable.
If you are not convinced yet, please let me mention two positive side effects:
First, such a tax would be good for the environment. If nobody were so rich to own his private jet or 100 feet yacht, silly and unnecessary consumption would rapidly decrease.
Second, with the income of this particular tax, other taxes could be abolished, such as sales taxes which harm economic development. Replacing inflation with a progressive wealth gap is not only in the interest of socialists, but also of environmentalists and liberalists.

 

[1] http://youngsday.com/2014/02/26/how-can-history-be-useful-a-historian-tries-to-give-an-example-2/#sthash.CXAKD9wR.dpbs

[2] In Europe, current low interest rates could result in rising economic instability, as money is rushed to risky businesses in order to escape devaluation.

[3] As the tight grip of neo-liberalists currently eases a bit, studies about the negative effect of inequality on growth get more attention than in the past. Interestingly, sociologists have found that inequality makes every part of society unhappier, even those who profit from it economically. It seems that most people prefer being wealthy in a safe way to being monstrously rich while having to fear the poor outside their gated communities.

[4] Thomas Piketty: Capital in the Twenty-First Century (2014). If you are too lazy reading his book (I wouldn’t blame you, the French are not famous for restricting themselves. Piketty managed to fill 800 pages with his message), I would recommend his appearance on the Colbert Report on June 2, 2014.

Gunnar Take

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