Former prime minister Nigel Lawson stares at him from a photo on the wall of his Downing Street study, and Rishi Sunak is keen to portray himself as a prime minister who helps encourage business and innovation.in his Spring Statement Last week, he claimed he would deliver “the largest net personal tax cut in a quarter-century”.

If he were still with us, a true darling of political power would disagree. Milton Friedman, the Nobel laureate and founder of the monetarism school, has no time for such claims from politicians at a time when prices are rising rapidly. In his 1980 TV series, Freedom of choice, He accurately and unfavorably described Sunak as playing with the politics of inflation and taxation.

“Before every election, our representatives want us to think we’re getting a tax break, and they’re able to do that while actually raising our taxes because they have a piece of magic in their toolkit. That magic It’s inflation,” he said.

Even Friedman was late, dismissing inflation as a bad tax.Written in 1919 Economic Consequences of Peace, John Maynard Keynes, a darling of the political left, also noted the benefits of inflation for some politicians. “Through an ongoing inflationary process, governments can confiscate a significant portion of their citizens’ wealth, covertly and unnoticed. Through this method, they not only confiscate, but arbitrarily,” he wrote.

No one should think that Sunak is deliberately causing inflationary woes around the world to keep us impoverished, but his decision has been resurrected after more than 30 years in the UK when no one worried about the concept of an “inflation tax”.

Sometimes inflation taxes can promote good tax policy. In the 1983 Budget, mortgage interest tax relief was capped at £30,000, roughly equivalent to the cost of an average UK house. This mortgage subsidy drove home prices, but apparently there was no prime minister after Jeffrey Howe raised the value of the dole, allowing Gordon Brown to repeal it in 2000.

More commonly, the effect of inflation as a tax is arbitrary. Just a year ago, the chancellor said in his March 2021 Budget that he was “do not hideA four-year freeze on the income tax threshold and exemptions. At the time, the chancellor wanted to cut the real value of allowances and thresholds to Raise £8.2bn a year by 2026-27.

Last week, Sunak was mum on a new estimate by the Office for Budget Responsibility that the same policy would now raise £18.8bn a year, as higher inflation would reduce the real value of allowances even more. According to the OBR, this measure alone adds £10.6bn to inflation tax in 2026-27, which is exactly the same total cost as a 1p reduction in the basic income tax rate and a higher National Insurance threshold.

For wealthier Conservative county voters, as Friedman warned 42 years ago, Sunak’s false claims of tax cuts won’t materialize and will further erode trust in politics.

Poorer households face a different type of inflation tax. Benefits and pensions will be revised up in April from last September’s 3.1 percent inflation rate. They will be compensated next April after a year of pain, and you can bet that ministers will then trumpet high growth as a generous solution rather than belated inflation compensation.

Friedman and Keynes were right. Inflation is a bad tax. It’s arbitrary, doesn’t require parliamentary approval, has bizarre distributional consequences, and encourages politicians to play games. Let’s hope this history doesn’t last too long.

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