Is printing money to pay government expenses regressive or progressive taxation?

Question

Lets say that the government decides to pay some of its expenses by printing money*. This (according to some schools of thought) effectively increases the inflation rate and devalues the value of the country's currency. So the government skims off a little bit from the whole country's money & the money everyone had is worth a bit less.

So we have a weird indirect form of taxation.

Would this form of taxation be:

• Regressive (taxing the 'poor' disproportionately)
• Progressive (taxing the 'rich' disproportionately)

*Not actually printing, but you get what I mean.
*Lets assume the amount created is below the amount which would trigger hyper-inflation.

Answer 1

It rather depends on what happens to wages and interest rates, a ceteris paribus issue, and who you identify as "rich" or "poor": for example current workers borrowing to buy a house tend to be richer than the unemployed but poorer than those with large savings.

• If wages fail to rise then existing workers may lose from this with their pay falling in real terms (while new workers resulting from the increased expenditure could gain)

• If interest rates fail to rise then existing holders of money may lose with the value their assets falling in real terms (while existing borrowers may gain as they have to repay less in real terms)

If both rise to reflect the impact of inflation, it is much harder to identify who is bearing the cost

Incidentally, the extent to which moderate unfunded increases in government expenditure actually affects inflation is an empirical question and the evidence is not conclusive

Answer 2

Depends. Who has the least currency?

Let us first take a look at the economics of inflation.
A certain economy has \$100 in circulation. If the government inflates the currency with an additional \$100, there is going to be \$200 in circulation.
If a crate of apples originally cost \$1 in the initial economy, the market will adjust the cost to \$2 in the inflated economy.
The original dollar only has half the purchasing power (and is only worth half a crate of apples) because the total amount of money in the economy doubled.

The same principles from this simple example can be applied to any real economy. When the government injects more money into the economy, each piece of currency in the economy loses a portion of its purchasing power, and the market adjusts by increasing the prices of goods and services.

Inflation is no respecter of persons. Bill Gate's money has devalued at the same rate as mine.
So, with respect to inflation, the currency is taxed neither at a progressive nor at a regressive rate; the currency is taxed equally.

However, notice that the taxation caused by inflation affects the currency only.

Let us return to our example. If we purchased a crate of apples in the \$100 economy, we would only pay \$1.
Then the government inflates the economy to \$200. If we try to resell the crate of apples (assuming that they have not spoiled), we can expect the selling price to be \$2.
There is nothing special about pre- or post- inflation apples; the apples are still worth the same amount and require payment with an equivalent purchasing power.

Now, we head back to the real world.
When people purchase books, cars, refrigerators, vacation homes, stocks, bonds, etc., they are shielded from inflation. They can sell the stocks, bonds, and homes at the new inflated price.
Unfortunately, whoever took their money suffers the brunt of inflation and is poorer for holding onto their money.