Jim Ferrin's reply (Forum Dec. 1) to my earlier letter is based on a common but fundamental misconception of the working of the economy and the purpose of taxation. He incorrectly assumes, as many politicians of both parties would like him to, that the purpose of taxation is simply to pay for goods and services.

However, all that the government would need to do in order to pay all of its bills would be to print more money, which Congress has the power to do. Congress could pay off the entire national debt immediately and balance all future budgets, simply by printing enough money to meet the costs. Congress does not do so because adding such a large amount of money to the system would be highly inflationary.Thus taxation is, basically, a hedge against inflation. Stated another way, inflation is really an alternative to taxation and vice versa. The difference between a system of inflation and a system of taxation is that a system of taxation allows the making of policy choices as to who should bear the burden. By contrast, inflation is really a perfect "flat tax," which falls on everyone in exact proportion to how much money they have, and which penalizes everyone who saves for the future.

Although Ferrin claims that taxing policies should be kept separate from social policies, the fact is that Congress, by deciding to tax at all, has already decided, as a matter of social policy, to encourage people to save, and depart from the flat tax caused by inflation. Once Congress has made that decision, it is too late for Ferrin to claim that taxation is not related to social policy.

Taxation, by its very existence, is an instrument of social policy. That being the case, the burden of taxation should be administered fairly, just as all instruments of social policy should be. The capital gains tax cut proposed by the new Congress reflects a social policy decision in favor of the richest members of the citizenry, who own most of the stock. The corresponding burden will have to fall somewhere, in the form of inflation, a reduction in services or, over the long term, increased taxation on another segment of the economy.

The increased burden on the middle class will more than cancel out the benefits of the $500 per child tax credit that Ferrin cites. The $500 tax credit is just a smoke screen.

Gordon J. Swenson

Salt Lake City