McCain & Obama's ongoing debate on taxes ignores inflation tax.

John McCain and Barack Obama have accused each other of offering tax proposals that would hurt the middle class. On October 18, McCain said that Obama's tax plan "would convert the IRS into a giant welfare agency, redistributing massive amounts of wealth at the direction of politicians in Washington." On the same day, Obama said that "McCain wants to give the average Fortune 500 CEO a $700,000 tax cut but absolutely nothing at all to over 100 million Americans."

In the back-and-forth between McCain and Obama on tax policy, McCain has repeatedly referred to "Joe the Plumber": Joe Wurzelbacher, the Ohio plumber who elicited Obama's comment that "when you spread the wealth around, it's good for everybody."

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Media reports about the candidates' tax debate ignore the fact that direct taxation only represents part of the cost of government. When government spends more than it takes in--for programs such as the recent $700 billion bank bailout, which both McCain and Obama supported--it must borrow the money to make up for the shortfall. When the money is borrowed from the Federal Reserve, and the Fed creates new money out of thin air so the federal government can pay its bills, then the result is a devaluation of the dollar and a corresponding increase in the cost (in terms of dollars) of everything we buy. In short, inflation is a hidden form of taxation, and it hurts everybody including Joe the Plumber.

There is no such thing as a free lunch, and the real cost of government is what it spends, not just what it collects in direct taxes. In fact, in theory, the government could abolish all taxes and pay all its bills through the creation of money out of thin air. But such an approach would make obvious the fact that inflation is a tax.