The inflation tax is a tax on those who hold money because as inflation increases, the purchasing power of money decreases. This means that those who hold onto cash will see a reduction in their wealth, making it effectively a tax on them. Choices A and B are not correct as the inflation tax does not transfer wealth from the government to households and is not due to lack of indexation.

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The Inflation Tax

Question 244

Multiple Choice

The inflation tax

A) transfers wealth from the government to households.
B) is the increase in income taxes due to lack of indexation.
C) is a tax on everyone who holds money.
D) All of the above are correct.

Correct Answer: