Tuesday 261027

 

Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.
PART 10 Money and Prices in the Long Run
Chapter 30 of 36 Money Growth and Inflation
Section 19 of 26
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Economists have identified several costs of inflation
· shoe leather costs
· menu costs
· inflation-induced tax distortions
· confusion and inconvenience
· arbitrary redistribution of wealth
All create relative price variability and the misallocation of resources.
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Inflation-Induced Tax Distortions
In general, taxes distort incentives.
They cause people to change their behavior and create a less efficient allocation of resources.
Taxes become even more problematic when there is inflation.
Lawmakers often fail to take inflation into account when writing tax laws.
Inflation raises the tax burden on income earned from savings.
One example of how inflation discourages saving is the tax treatment of capital gains, which are the profits made by selling an asset for more than its purchase price.
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Suppose in 1980 you used some of your savings to buy stock in Microsoft for $10.
Then in 2008 you sold the stock for $50.
You thereby earned a capital gain of $40.
This capital gain must be included in your taxable income.
Suppose inflation caused the overall price level to double from 1980 to 2008.
So, the $10 you invested in Microsoft 1980 is equivalent, in terms of purchasing power, to $20 in 2008.
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When you sell your Microsoft stock for $50 you have a real gain, an increase in purchasing power, of only $50 - $20 = $30
But the tax code does not account for the inflation effect on the original $10 investment and assesses you a tax on a gain of $40.
So, inflation
· exaggerates the size of capital gains since nominal not real gains are used
· thereby increases the tax burden on capital gains
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the size of gain is exaggerated
ritoku no ōkisa wa kochō sa reru
利得の大きさは誇張される
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Why did Mexico change to the new peso in 1993?
Mexico changed to the nuevo peso in 1993 mainly because years of inflation had made prices, wages, and financial records inconveniently large.
Removing three zeros made everyday transactions and accounting much simpler—for example, 10,000 old pesos became 10 new pesos.
It also served as a psychological and symbolic break with the high-inflation past and supported the government’s effort to restore confidence in the currency.
The redenomination itself did not create new purchasing power.
It was mostly a cleaner unit of account after inflation had already been reduced.