The Tax Cuts and Jobs Act (TCJA) signed into law on December 22, 2017, promises no relief from one big tax on income — the inflation tax. Quite the contrary, there are strong grounds to expect this burden to increase as new and unannounced methods of collection evolve further.

In recent years, the Fed’s commitment to the two-percent inflation standard, buttressed by radical experimentation in interest rate manipulation, has created a famine of interest income from which Uncle Sam has been a main gainer. Just look at the dwindling interest bill on government debt. As the Federal deficit to GDP ratio now climbs to a new peacetime record for the US economy in a late boom phase of its business cycle, this partly hidden and widely underestimated form of inflation tax alongside its older forms loom large as potential expedients to tackle crumbling public finances. 

The omission of the inflation tax from the whole discussion about the Republican tax cuts may be due partly to the failure of the economic profession to update its analysis of this subject. Yes, it was a popular topic for study during episodes of high inflation in the past including the great hyperinflations of historical folklore. It has suffered some neglect since, even though monetary inflation remains prevalent. Official inflation rates reported over many years of “only or below” two-percent have proved to be a tonic to academic inquiry.

The monetary officials who administer today’s two-percent inflation regime deny that they are tax collection agents. They claim that the interest income famine stems from natural misfortune (dwindling investment opportunity, excess savings) and that two-percent inflation really isn’t that bad given the difficulties of measuring quality improvements. A powerful downward rhythm of prices attributable to globalization and digitalization has allowed them to pursue monetary inflation and levy inflation tax in the new form of interest rate manipulation — all while complaining that “inflation is too low” and winning friends enriched by asset price inflation.