Is Tyler Right About Defending Against an Inflation Tax?
In a post talking about Libra, Tyler Cowen makes this argument:
Let’s say the core rate of inflation in a country is eight percent, which is about the current rate of price inflation in Myanmar. It is still not the case that an unbanked farmer holds currency for the entire year (he is more likely to buy land or animals as a means of large-scale saving). I am not sure what monetary velocity is for this group of people (readers?), but say currency turns over four times a year on average. That is in essence a two percent tax on currency holdings, not an eight percent tax. I don’t think that individuals will switch monies for such a small gain, noting that decreasing their demand for money (i.e., increasing currency velocity) is another possible response.
I’m pretty sure the part I put in bold is wrong, do you folks agree?
For example, suppose every 6 months my number and I swap houses. We didn’t just cut the property tax rate in half.
I think what Tyler is trying to say, is something like, “The fraction of your wealth that you lose to currency debasement, can be reduced by reducing the fraction of your portfolio consisting of currency.”
But even so, I think it’s really misleading to write the statement that Tyler wrote. I mean, you could say the federal gas tax right now is “in essence” much lower than the official value, because people drive less when gas is taxed. We don’t normally talk like that.
Who’s your number? Did you mean neighbor?
if you own one house with a property tax of $1000 a year and you live there the whole year then your tax bill would be $1000. If you time-share that one house with your neighbor then your tax bill goes down to $500 which is (I’m guessing) what Tyler has in mind. But if you own 2 houses and time share them both your tax bill is back to $1000. So I agree with you. If each currency unit has 4 owners during the year then each owner pays only 1/4 of any “inflation tax” on that unit. But as each owner holds the unit for an average of 3 months a year that still comes out as an annualized 8%.
Though thinking about it a different way:
If there in $1,000,000 in housing stock and a property tax of 8% then while the total tax bill always remains the same the more people who share each property the lower the tax amount per person will be. And the lower the amount per person the less likely they are move to a an area with lower property tax.
The same thing applies to money – the higher the velocity of money the less the impact of an “inflation tax” per person is and the less likely it is people will switch to a new more stable currency. So while I agree the 8% v 2% thing is a bit confusing (and possibly wrong) the overall point Tyler is making seems sound.
Isn’t this simpler than how many times a farmer spends his money? If the farmer holds an average of $1,000 through out the year and inflation was 8%, then the real value of his average holdings will decline by $80. Buying land and animals or engaging in many transactions would only matter to the extent that these activities reduced his average monetary holdings.
‘I think what Tyler is trying to say, is something like, “The fraction of your wealth that you lose to currency debasement, can be reduced by reducing the fraction of your portfolio consisting of currency.”’
The higher the velocity of the currency then the lower the fraction of the average person’s portfolio will consist of currency.and the lower the impact of currency depreciation will be for them, so the less likely they will be to switch to a more stable currency – I think that is Tyler’s point.
Yes, it’s equivalent. Keeping less currency in your portfolio means ensuring you buy a real asset ASAP when you are paid by someone else.
People who are in the habit of looking for ways to offload their currency as quickly as possible might very well consider buying into a more stable currency, presuming they trust it at least as much as their other options.
“My income tax is 0 because I’m unemployed, why so much fuss about the income tax?”
>I mean, you could say the federal gas tax right now is “in essence” much lower than the official value, because people drive less when gas is taxed. We don’t normally talk like that.
In a sense, we do, or at least, the US government’s inflation measurers do. That is, they use the convention that, when the price of a good (in the basket) goes up, people switch to a substitute, so you should treat inflation as not really having gone up that much, right? (I forget the term for this modifier.)
“For example, suppose every 6 months my [neighbor] and I swap houses. We didn’t just cut the property tax rate in half.”
Swapping a house for another house is not the same as swapping currency for something that is not currency. If you swapped your house for his car after 6 months then you would have cut your property tax for that year by half. You would then have to live in your car. This would be a considerable dead weight loss.
The farmer in Myanmar can possibly swap his cash for other things with very little dead weight cost.