The subject of taxes is typically highly charged with political animosity.  During every election cycle, there tends to be quite a bit of discussion how what the ‘right’ amount and structure of taxation should be.  However, there are actually two types of taxes that people pay.  The first is the taxes that the IRS or state revenue agency assesses on your earned income during the year.  (This is what most people think of when you say the word taxes)  The second and much stealthier tax is inflation.

At this point, I’m sure that many of you are wondering what inflation has to do with taxes.  Most people think of inflation as being the result of increases in the price of commodities such as oil or concrete.  However, let’s step back from the details for a moment and think about the big picture.  If the total amount of products & services in the economy stays the same, and the total amount of money in circulation (both hard currency & electronic records) stays the same, any time one product goes up in price something else would have to go down in price.  The only way that you can possibly experience an across-the-board increase in prices is for economic output to go down or for the amount of money in circulation to increase.  (Please note that this isn’t an original observation.  Milton Friedman won the Nobel Prize in 1976 for his work on the relation between monetary policy and inflation)

So how does this relate to taxes?  Since the government has the power to increase or decrease the money supply, they have the ability to spend money without increasing taxes by increasing the money supply.  Because of this fact, the primary danger of the national debt is not that the government will not be able to pay its obligations.  (The federal reserve could literally ‘wipe-out’ the national debt by purchasing all of the outstanding government bonds with treasury notes and tremendously increase the money supply, thus causing widespread inflation)  The primary danger of the national debt and unfunded social security / medicare obligations is that the government will have to massively inflate the currency to meet its previously committed obligations.  Ultimately, this amounts to a tax that is never passed by congress.