The inflation tax.(THE LAST WORD)(federal taxation and inflation)

If the American taxpayers knew how much the federal government was actually costing them, there is no doubt that it would be much smaller than it is today. But the true burden of the federal government on the taxpayer is obscured in many ways.

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For example, the federal government does not send American workers a bill for the income taxes they are expected to pay. Instead, those taxes are automatically withdrawn from workers' paychecks by employers who double as tax collectors for the federal government. With workers never actually seeing the money withheld for the federal government, it is easy for them to lose sight of the fact that this money is part of what they earned. Just imagine the reality check to taxpayers if they actually received this money in their paychecks and then were billed by Washington for it!

The collection of FICA and Medicare taxes is much more obscure. These taxes are also withheld by employers for the federal government, but employers must match the FICA and Medicare taxes their employees pay. Consequently, the amounts shown on worker paycheck stubs for these taxes represent only half of what workers are effectively paying. After all, when an employer hires a worker, the cost of hiring that worker includes not only the worker's salary and benefits but also the employer's share of the FICA and Medicare taxes.

The federal excise tax on gasoline is undoubtedly a tax most consumers do not think about when they put gasoline into their cars. Even more obscure to consumers are the various taxes manufacturers must pay and build into the prices of their products, from widgets to cars.

But even if taxpayers were to receive an annual itemized statement documenting every penny they paid in taxes over the course of the year, it would still fall short of what the federal government is actually costing them. The reason: taxation is only one means by which the federal government collects money from the American people to pay for its programs; the other means is inflation.

Because the federal government does not collect enough tax revenue to pay for its programs, it must borrow money to make up for the shortfall. When the Federal Reserve expands the money supply (inflation) in order to finance this debt with newly created dollars, the result is the devaluation of already existing dollars and higher prices for goods and services.