The science of contemporary monetary theory arose to solve the problem of how the central bank should conduct monetary and banking policy under a fiat monetary regime. An important result was to provide an optimal amount of inflation tax revenue through inflation tax targeting. The inflation rate to target was found to be very low, such as that consistent with natural seigniorage.

Nonetheless, the Fed became typical of international central banks by financing significant US Treasury spending, especially during wars and crises. It also decided to try to maintain the growth of the global financial system. Although the conduct of the Fed's banking insurance role has become murkier, its inflation tax collection policy was clear up until 2008.

From Bailey (1956) to recent news headlines, economists have recognized the inflation tax as equivalent to a fiscal tax, enacted by the monetary authority through discretionary action to finance Treasury expenditure. Recently, Leeper and Zhou (2021) find that 50 per cent of new marginal fiscal expenditure in developed economies is financed by increasing the inflation tax. In its 13 October 2021 editorial “The inflation tax rises”, The Wall Street Journal (2021) anticipates the high inflation tax episode that was experienced in 2022.

The Fed is unbound by the usual process for raising taxes. Article 1, section 7, of the US Constitution explicitly states: “All Bills for raising Revenue shall originate in the House of Representatives. The Senate may propose or concur with Amendments as on other Bills”. The House tax bills must arise in the Ways and Means Committee, which is the “oldest committee of the United States Congress, and the chief tax-writing committee in the House of Representatives”, according to the Committee's website, which was “[f] irst established as a select committee on July 24, 1789 … and was formally listed as a standing committee in the House Rules on January 7, 1802”.

The US tradition of a tax-raising committee is modelled on that of the United Kingdom. UK Parliament web pages state that “Ways and Means is a traditional term for taxes or other charges levied on the public in order to fund Government spending”. The United Kingdom had a formal Ways and Means Committee from 1641 to 1967 that originated proposals for taxes.