Inflation tax

ABSTRACT In Turkey, inflation is the most important economic problem which arised at the begging of 1980' s and grew gradually up until now. It is generally claimed that the main factor that accelerates the inflationary pressures is the public sector's fiscal deficit in Turkish economy. In financing above mentioned deficits the easiest and, therefore, mostly used way is monetization. Depending on monetization, government collects some additional revenue, so called "inflation tax." In this study, inflation tax revenue and the rate of inflation that maximizes this revenue are calculated for the period 1987-1997, using the model developed by Anand and van Wijnbergen. During the period under consideration, the inflation rate that maximizes the revenue from money creation is 58 percent in a year. In Turkey the ratio of inflation tax to gross national product varies between 2 and 4 percent a year. Empirical results obtained for Turkey, however, show that 20 percent of the total tax revenue comes from inflation created via excess monetary growth. Obtained results depending upon the data on inflation and other related variables display that public sector in Turkey does not acquire the funds from inflation tax as much as generally accepted to be high. The main reason for such a result is that collected inflation tax revenue mainly goes to private rather than public sector. Consequently, the revenue that government gets from inflation is incomparably less than the social cost that the society endures. While inflation destroys the tax system in the country, it also produces an uneven tax burden and its distribution in the economy. The high inflation rates lived every year for a long period of time in Turkey also demolish income-resource distribution and have negative effects on economic growth and balance of payments. In order to stabilize the Turkish economy, therefore, the principal objective of macro economic policies is to struggle against inflation.