Hi there. You may hear of inflation as a stealth tax. Not too many people get into the numbers behind it. Here is my take on inflation on a stealth tax with some calculations.
There are different definitions of inflation. One would refer to the increase of prices while another one refers to the increase of the money supply which would reduce the purchasing power of a currency.
Price Of Eggs Increase Example
Assume a tax rate of 10% within some country. The price of a dozen of eggs 5 years ago was 2 dollars. The current price of eggs goes up to 4 dollars.
The tax paid on the dozen of eggs was 10% of 2 dollars which is 20 cents.
The tax paid on the eggs that was 4 dollars is 40 cents. Price increases would result in governments collecting more tax revenue without even raising the tax rate.
Price Decreases Results In Lower Taxes
Let's say that a 2000 dollar TV is on sale for 1200 dollars. The tax rate is 12%. How much tax collected from the 2000 dollar TV and the sale price TV?
Twelve percent of 2000 is 240 dollars and 12% on 1200 dollars is 144 dollars. This 800 dollars decrease in price leads to the consumer paying 96 dollars less in taxes. You can look at it as the government getting 96 dollars less in tax revenue.
Fixed Income & Low Income Individuals Suffer From Higher Prices
Many people are noticing the price of goods and services are rising. Cost of living is getting higher and higher. For those on low and/or fixed incomes it becomes harder to make ends meets with grocery bills, utilities bills, rent, car payments, mortgage payments, etc. The money does not buy as much compared to before.
Cost increases is one major problem for many lower income people. Additionally, the price increases also increases the amount of taxes to be paid. This is a double whammy effect going on. The price of eggs increase example above is one example. Although this is more of supply and demand, cost of certain goods and commodities like oil and energy can increase.
An economic policy like raising tax rates would be really unpopular. There will be angry people who would be against such a policy as the cost of living would increase even more. Lowering tax rates could be helpful. However, tax payments could increase if prices of goods and service go even higher.
Theoretical Example
The price of a 1 litre carton of milk goes from 2 dollars taxed at 10% to 4 dollars. Taxes were also reduced from 10% to 6%. How much tax is collected in either case?
The 2 dollar milk comes to $2.20 after tax. 20 cents is the tax amount.
From the 4 dollar milk, the tax amount is 24 cents. The final price would be $4.24.
The above is one example from many where lowering the tax rate could still result in higher tax payments given that the price increases reaches a certain level. In summary, higher prices leads to higher taxes and a higher cost of living.
Thank you for reading.