top of page
Inflationary Tax
Issue
To control inflation, the government adjusts the prime interest rate that commercial banks use as a basis for lending. The higher the interest rate, the greater impediment exists for consumer spending which in turn, lowers the risk of inflation.
However, this approach is problematic in that it only affects a consumer's credit line which has little effect on those who don't take out loans for purchases. Another concern is that it takes several months for the new interest rate to take effect on the economy and something more timely would be preferred to control inflation.
Solution
Instead of adjusting interest rates, a better means of controlling inflation would be to impose an inflationary tax on all goods and services nationwide. Which would be similar to a value-added tax but with the purpose of controlling inflation.
Managing inflation in this manner would be more effective since it applies to all consumers regardless if they use cash or credit for their purchases. It will also have a more immediate impact on the economy rather than waiting several months for the adjustment to take effect.
By having a more direct means of controlling inflation than adjusting interest rates, the nation's economy may advance at a moderate pace while inflation is kept at a minimum through the new measure.
Other Considerations
A possible concern with controlling inflation in this manner is that it provides a broad-based effect on all goods and services regardless if certain sectors are experiencing a higher rate of inflation than others. At times, a surgical approach may be more appropriate that can target specific sectors than a generalized policy that affects the entire economy.
Discussed in my other post (c.f. Medical Insurance), it mentions that to reduce medical costs, the Department of Health should establish a nationwide charge list to determine the cost of all medical services in the country. A charge list is commonly used by hospitals and medical centers to regulate how much they should charge their patients for their services.
In similar manner, the Department of Commerce should be granted the authority to regulate price controls in specific sectors that experience greater inflation than others. For example, if gas prices rise due to a weather-related event (e.g., hurricane), the Dept. of Commerce may set the maximum limit on gasoline to prevent runaway inflation and price gouging (e.g., only a 5% increase is permitted after the event).
If food prices rise due to something unexpected (e.g., Covid-19 viral outbreak), the Commerce Dept. may step in and bring such costs under control by placing limits on food items rather than allowing them to get out of hand. Exceptions may be permitted if the price increase is justified with financial proof being required by the business.
For the housing market, values have risen due to homes being purchased by multibillion dollar corporations at higher than original prices (to be used as rentals). This caused the housing market to be artificially inflated that prevented the average family from being able to purchase a new home.
To correct this, such entities should be restricted from purchasing a home until it has been on the market for at least a year. This will allow the average family to purchase a home at reasonable prices while permitting the seller to make more money if they're willing to wait longer. The same rule should apply for individuals who purchase additional homes that are meant to be investments or rental properties rather than as primary residences.
Another way to reduce prices is to limit the selling price of a home to not exceed the previous three-year average of the home’s value. This method is commonly used for determining property taxes so it may also be used to restrict the price of homes as well. After a year, any price is possible by the seller.
These are just a few examples where price controls imposed by the Dept. of Commerce may be used to prevent runaway inflation in sectors rather than a broad-based inflationary tax policy that affects all goods and services nationwide.
bottom of page