Question

What is an inflation tax, and how does it make the impact of inflation on people worse?

Answer 1

Sustained rise in price level is called inflation. Government resorts to deficit financing to fund it's expenditure. Government goes for deficit financing where it issues new currency. Thus government raises money and makes expenditure. It increases inflation rate in economy. It is called inflation tax. Government instead of taxing people, tend to raises the revenue through new issue of currency.

It will make condition of people more worse. Rise in inflation reduces the purchasing power of people. Specifically, the fixed income group are hard hit by the such inflation. Zimbabwe is an example of such inflation where massive rise in inflation devastated whole economy.