Inflation tax
An inflation tax is a hidden tax on the cash and cash equivalents in one denomination of currency. For example, if the inflation rate is 5%, then your dollar only buys 95 cents of goods and services next year and has the same effect as a 5% annual cash tax on your cash holdings. See also: inflation.
Inflation tax is the economic advantage gained by the government of a country that results from directly or indirectly inducing inflation.
Governments are almost always net debtors (that is, most of the time a government owes more money than others owe to it). Inflation reduces the relative value of previous borrowing, and at the same time it increases the amount of revenue from taxes. Thus it follows that a government can improve the debt-to-revenue ratio by employing inflationary measures.
However, as the saying goes, there is no such thing as a free lunch. If the government continues to sell debt, by borrowing money in exchange of debt papers, these debt papers will be affected by inflation: they will lose their value, and therefore they will become less attractive for creditors, until the government will not find any willing to buy debt.
An inflation tax does not necessarily involve debt emission. By simply emitting currency (cash), a government will induce liquidity and may trigger inflationary pressures. Taxes on consumer spending and income will then collect the extra cash from the citizens. Inflation, however, tends to cause social problems (e. g. when income increases more slowly than prices).