The Silent Tax

Sep 27, 2011 by

There are many people out there who go on news shows and different opinion shows and say that we don’t need to tax people, we just need to print money.  Indeed, the fed is printing money to compensate for some of the debt that is in place.  However, it seems to me that printing money without GDP growth is a silent tax on everyone.

First, let me explain the money supply.  Now, GDP, Gross Domestic Product, is the measure of value in this country.  It is the measure of what we produce in a nation.  Now, there are two numbers to know in the money supply question.  The first is GDP.  The second is a fraction.  This fraction is [your money]/[total money in circulation].  Now, let us create a sample group for a demonstration of how this works.  Imagine a group of three people, Mike, Jane, and you.  You and Jane produce a can of coke each.  You both sell those two cans.  Now, if each can of coke is worth 10 on the GDP scale, the total GDP of that group would be 20.  Now, currently there are two dollars in circulation in that group.  Jane and you own those two dollars.  The reason you own those dollars is you produced the items.  You produced half the GDP, thus you own half the money.  ½ is the fraction.  Now, imagine Mike produces a can of coke.  Thus, the GDP is now at 30.  Now, money supply must increase to match GDP.  Otherwise, your fraction is ½.  This means you contributed to ½ the GDP, 30, so you are worth 15 GDP.  This is false because you are worth 10 and mike is worth 10, though his fraction says he is worth 0.  That is how the money supply works, in a very basic sense.  Money is printed to match GDP.  The fraction of the money supply that you have should reflect the amount of GDP that you produced.

Now, we were at 30 GDP and 3 dollars in circulation in our group.  You had one dollar.  Mike also has the power to print money.  Let us say that Mike wants money.  Thus, Mike goes to his printing shop and produces one more dollar in circulation for himself.  Now, let us look at this.  Mike has two dollars, you have one, and Jane has one.  Thus, there are four dollars in circulation.  So, your fraction is ¼.  Now, the total GDP is 30 and you produced 10, so you produced 1/3 GDP.  Now that Mike has printed a dollar, you are worth 7.5/30 GDP.  That means your GDP worth dropped from 10/30 to 7.5/30 GDP.  Meanwhile, Mike increased from 10/30 to 15/30.  Now, imagine if Mike could tax and instead of printing a dollar, he collected .25 of everyone’s money.  Mike would have 1.50 and you and Jane would each have .75.  This reduces, GDP wise, to Mike has ½ GDP while you and Jane have ¼.  Thus, printing a dollar has produced the same effect as a tax.

Thus, when people suggest printing money without increased GDP, you know that that means a universal tax on everyone.  Thus, instead of this hidden tax through printing money, why not come out in the open and just increase the tax rate?  That would seem to be the best solution.

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1 Comment

  1. the Hedgehog

    Great article: What people really don’t understand is that inflation is not just a tax, it is a regressive tax: A tax on the poor and a tax on the savings of the elderly; those who can least afford it. If the elderly, living on fixed incomes, suffer the effects of inflation it is the same thing as taking money out of their bank accounts. And those same poor people politicians court with expansive government programs suddenly find themselves with less value in their already meager pittance.

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