Suppose we replaced the federal income tax with inflation.

I just filled out my taxes this year, and it seems an awful waste of time. And TurboTax (and the tax code for which it stands) is increasingly sucky.

Suppose we replaced the federal income tax with inflation. The federal government holds a monopoly on money, so this is a plausible policy choice. What would happen? We would reduce all of the costs associated with collecting and complying with tax law. No more IRS, no more April 15.

Instead of trying to maintain the value of money, we would slowly devalue money by the amount of government spending.

Imagine we have an economy with two individuals:

One earns $100,000, the other $50,000. Government taxes are 15% for all income up to $50,000 and 30% for income in the bracket between $50,000 and $100,000 and so the government takes in $7,500 from individual one and $22,500 from individual two, for a total of $30,000. Assume the remaining money is all spent.

Now let’s assume we have no taxes. The government just prints $30,000, so instead of an economy of $150,000, we now have an economy nominally valued at $180,000. Of course production is just the same (aside from some savings in tax collection). The next year to purchase the same amount of goods, everyone demands a wage increase of 20%, so incomes are $120,000 and $60,000 respectively.

(The following year, the government prints another $36,000, and wage demands are higher and so on).

Is anyone worse (or better) off in this situation, if it was understood that government spending would be no greater (or lower) than otherwise in real terms? I.e. assume everyone has rational expectations and the government is responsible.

Could this be advantageous to the United States, as there is so much foreign ownership of US dollars, to help export some of the costs of maintaining the government (and clearly it would be detrimental for whomever holds dollars at the time this is announced)? Certainly the currency would be devalued slowly as a consequence of this guaranteed inflation. The US dollar might lose some of its reserve status. Without the political check of taxes, government might be tempted to spend more as the consequences are hidden in the prices of goods and labor.

(I am aware of the risks of hyperinflation, but we handle some inflation each year now without hyperinflation, so what is the threshold beyond which confidence is lost in the system?)

There would be a one-time shift in favor of borrowers and wiping out lenders, maybe discouraging future lending. On the other-hand, the government would cease to be a future borrower. Nominal interest rates would also have to be at Inflation + Rate of Return, so would be much higher, but so would nominal returns.

Instead of arguing about the rate of taxation, we would argue about the rate of inflation. At least it would be a new argument.