The Phrase “Taxation without Legislation” was coined by Milton Freidman, of Chicago School of Monetarism, who having analysed the monetary aggregates of the United States during the period 1867 to 1960 delineated the mechanisms of inflation as a monetary phenomenon and manifested the quantitative interdependence between the aggregates of products -Goods and Services in circulation, on the one hand, and the volumes of moving liquidity, on the other, within the national economy[1]. As such, the inflation could only be managed by harmonising the volume of moving liquidity in line with aggregates of products in circulation.

The focus of this article is on how the inflation constitutes a taxation without legislation, while other important aspects of inflation such as “How the Inflation is Created”, “Why the inflation is Created”, “The Role of Budget in Creating Inflation”, “The Role of Inflation in Liquidating the Public Debt” and many others are analysed in a dozen of articles published in the author’s personal website [2].

Inflation means the dilution of the purchase power of money on a national scale and is different from expensiveness of given prices in some markets, as in the case of inflation the national currency gets leaner and is capable of purchasing less of products, while in the case of expensiveness, the elevation of some price is caused by either weakening of supply or strengthening of demand in the market in question while the purchase power of money on a national level is intact. Therefore, inflation means a general reduction of purchase power vis-à-vis all products including capital goods such gold and foreign currencies. Expensiveness is remedied when the supply and demand equilibrium in the given markets is restored, but inflation is dependent on the relative proportions between monetary aggregates and national products on a macro-level and the market equilibrium does not affect it.

Where Inflation can occur. Inflation cannot occur in a barter-economy; it cannot either occur under the monetary system based on “Real Bills Doctrine”, where every unit of currency represents a real bill as a token of a real wealth.[3]

The same verdict applies even under the system of the Central Bank Money, i.e. The Fractional Reserve System, provided that the volume of liquidity is controlled in tandem with the growth of national economy. In other words, inflation under the Fractional Reserve System is caused by disproportionate increase in liquidity compared to the volume of national product in circulation.

How is  the  excessive money injected into economy?

The “excessive” money is injected in the veins of national economy through creation (printing) of money by the central bank in order to finance the budgetary deficits. In other words, a “balanced budget” being composed of taxes and real incomes corresponds to the principle of “Real Bills Doctrine” and thus is immune to inflation. The budgetary deficits financed through treasury bills sold to the public and private companies would not lead to inflation because it rests on the wealth produced “ex-ante”. But the same deficit financed by Central Bank’s base money leads, through money-multiplier, to the creation of liquidity, every unit of which to be multiplied by velocity, while the whole liquidity mass represents more than the real products. The same applies when the budgetary deficit is financed by loans from the Banking System which in turn ends in the commercial banks withdrawing from the central bank or withholding assignment of their legal reserves to the central bank. A budget financed from the wealth produced -ex ante- and the government- exports to be realised- ex post-, may not lead to inflation provided the foreign exchange obtained through exports are used for imports, where the liquidity is adjusted for the internal outlays on the exported goods (Sterilization).

Taxes as non-inflationary source of Budgetary outlays. Taxes are levied on the public wealth or income through legislation by a legitimate body to produce public services. Any levy beyond this legislation is unlawful. But governments contrive ways of seizing portions of people’s wealth and income in a myriad of ways:

• Printing Money. The foremost method of this confiscation is through printing money to finance budget deficits. This implies conditioning the monetary mass to the size of budgetary needs rather that to the volume of national product. This measure causes inflation and is a levy imposed on all and everybody and impoverishes anybody holding a unit of the national currency. This impoverishment is not constrained to income-brackets but affects even the poor and destitute in society by diluting the product-content of money.
• Forcing Government Bonds to the Banking System. The secondary source is issuing bonds and imposing it on the banking system whereby the banking system drained of cash, becomes forced to withdraw from the central bank thus converting the loans to government into debt to the central bank. The debt of the banking system to the central bank equates money printing of the central bank itself and is impacted by money-multiplier in producing liquidity.

Time-lag in creating inflation. The inflation is not produced immediately following the printing of money but in step with money entering in circulation. The excess money entering in the labyrinth of the market structure impacts different structures in different way: In general, the excess money pushes up the demand, which pushes up the price; consequently, the production increases and the wages rise in the subject market. But given the lag-time the enhanced demand shrinks due to price-rise and the market finds a secondary equilibrium at a lower level of demand and higher level of price. This inflationary wave moves from market to market and affects the whole national economy whereby the economy attains a new general equilibrium at “higher prices”. This equilibrium is called the “Inflationary equilibrium”.

Expectation Inflation. Continuousness of inflationary waves give rise to social expectation of approaching inflation, which affects the behaviour of both demand and supply side: buyers become inclined to buy quicker to minimize the erosion of the value money and by doing this they push up the demand; while sellers concerned with the replacement cost of their stock, tend to sell later, thus reducing the supply: hiked demand and reduced supply lead to sequential waves of inflation caused by expectation. This is an incremental inflation on top of the one brought about by disproportionality of liquidity and products in circulation”!

Impact of Inflation on government revenues and expenditures.

Assuming a 50% annual inflation-as is the case in Iran- the government pays the salaries of its nine million employees and retirees, by a currency which loses its value 4-5% every month thus paying less than it is contracted to pay: while the tax revenues of the government being based on percentage of an inflated earned income grows in tandem with inflation. Inflated incomes exceed the defined income-brackets and become subject to higher tax rates. Thus, the increase in NOMINAL earning increases the government tax collections.

Losers and winners of inflation. The inflations disrupt the equilibria of all markets; make savers poorer debtors richer when interest rates are below the inflation rate: the debtor of a 10 million Toman would pay at the end of a year a nominal 10 million which has the purchase-power of only 5 million plus a 20% interest on the nominal debt, bringing it to a nominal 12 million. While this 12 million has the purchase power of only 6 million of the beginning of the year.

The Biggest winner of inflation is the biggest debtor. The biggest debtor within the economy being the government with an accumulated debt of above 300 quadrillion Tomans (300 X10 ^ 15), would thus liquidate half of its colossal debt every year.

Conclusion.  A glance at the figures of Central Bank would depict a more complete picture of what has been happening in the country:

The Size of the National Product has grown 2.65 times since the advent of the Islamic Republic in 1979 while the size of liquidity has grown 8,890 folds. This is reflected on the consumer price index, meaning one unit of currency of the year 1979 equals about 9000 units of today’s currency: therefore, anybody whose income is increased by a factor of less that 9000, has become poor.

The discrepancy measured in terms of Foreign Currency based on the data from IMF, aggravates the situation:

National Income per capita

Constant 1980 Us dollars

1978               ۲۰۲۳

۲۵۰۰                ۱۱۵۵

 Thus, it is obvious that:

1) Inflation is born out of Excessive Currency running after limited Products;

2) Unproportional growth of liquidity (9000 times) in contrast with the 2.7- fold growth of National Product (in Constant 1978 currency) witnesses the a corrupt link between the Nominal and Real Economy where the monetary system “runs wild” in favour of the dominant political strata and to the detriment of the majority of population whose share of the national cake is subjected to an “engineered poverty”.

[۱] Milton Freidman & Anna Jacobson Schwartz: A Monetary History of the United States 1867-1960,

A Study of the National Bureau of Economic Research, New York, Published by Princeton University Press, Princeton, 1965.

[2] Hassan Mansoor.blog

[3] The secret of “paper being transformed to money” under Real Bills Doctrine is explained in an article (in Farsi) to be found in the Site as “