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Inflationary Tax
Issue
To control inflation, the Federal Reserve 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 and 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 using the prime interest rate, a better means of controlling inflation would be to impose an
inflationary tax on all goods and services. Which is similar to a value added tax, but with the purpose to control inflation.
An inflation tax would be effective since it applies to all consumers regardless if they use cash or credit for their purchases. It would also have a more immediate impact on the nation's economy rather than waiting several months for the adjustment to take effect. By having a separate means to control inflation than interest rates, the nation's economy may advance at a more moderate pace, while inflation is kept at a minimum through the new policy.
Other Considerations
A possible concern with an inflationary tax policy 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 rather than a general policy that affects the entire nation.
Discussed in my other post (c.f. Medical Insurance), it mentions that to reduce medical costs, the Department of Health will need to establish a universal charge list that dictates the cost of all medical services in the country. A charge list is commonly used by hospitals and medical centers today to regulate their expenses regarding 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 on specific sectors that experience greater inflation compared to others. For example, if gas prices rise excessively due to a weather-related event (e.g., hurricane), the Dept. of Commerce may set the maximum cost on a gallon of gasoline in order to prevent runaway inflation and price gouging.
If food prices rise excessively due to something unexpected (e.g., Covid-19), the Commerce Dept. may step in and bring such costs under control by placing price 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.
For the housing market, values have risen due to corporations purchasing homes at higher than original asking prices (to be used as rentals). This caused the housing market to be artificially inflated over the years that prevented the average family from being able to purchase a new home. To correct this, a restriction should be imposed to prevent such entities from purchasing a home until it has been on the market for at least two years. This will allow the average family to purchase a home at reasonable prices since they wouldn't have to compete with multibillion dollar corporations, while also permitting the seller to make more money if they're willing to wait longer. The same rule should apply to individuals who purchase additional homes that are meant to be rental properties.
Another measure that can be used to constrain the housing market is to establish a policy that limits 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 could also be used to restrict the price of selling a home as well. After the two-year limit, 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 specified sectors rather than using a broad-based inflationary tax policy for all goods and services.
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