Tax Increases Are the Best Cure for Inflation

[applegrove]

Tax Increases Are the Best Cure for Inflation

March 21, 2023 at 1:00 pm EDT By Taegan Goddard 34 Comments

https://politicalwire.com/2023/03/21/tax-increases-are-the-best-cure-for-inflation/

"SNIP.......

Matthew Yglesias: “The collapse of Silicon Valley Bank is in part a story of mismanagement and poor regulatory supervision, but it’s also in an important sense a consequence of the decision by the Federal Reserve and other major central banks to fight inflation by raising interest rates. Which in turn should put on the table the long-ignored question of why exactly interest rate hikes have become the world’s preferred anti-inflationary measure.”

“A big part of the answer is simply that raising interest rates is a thing that central banks have the legal authority to do, and there’s widespread belief that it makes sense to delegate macroeconomic stabilization to central bankers. But if you step back from that aspect of institutional design, there’s a strong argument that taxes are a superior inflation-fighting tool, one that would slow inflation in a more direct and more predictable manner. If the main problem with fiscal policy as an anti-inflationary measure is that the main inflation-fighting institution isn’t allowed to use it, then maybe optimal policy would involve adding a fiscal dimension to the Fed’s authorities.”

“After all there is something deeply perverse about raising interest rates to slow the economy only to flip around and do bailouts to prevent interest rates from slowing the economy too much.”

........SNIP"

[bucolic_frolic]

1. Businesses are already fighting inflation by raising prices

Sounds perverse, but it does reduce aggregate spending power, which is the whole point.

As for the bird-brain proposal that the Fed should be granted the power to raise taxes to fight inflation, um ... is it Constitutional?

[applegrove]

2. No but Congress could do a variable vat tax. Corporations raising

prices to gouge results in higher inflation and higher interest rates. Higher interest rates are what got the banks in trouble these past two weeks. More inflation is not the answer to inflation.

[LonePirate]

3. That is more pie in the sky idealism that will never become a practical tool.

For one, the Fed can raise interest rates at its convenience as often as it wants/needs to do so.

Tax rate increases are an almost impossible task in Congress, especially the current one, as Republicans (who control the House) will never, ever back a tax increase. Threading the needle in the Senate is almost as difficult a task when raising rates on individuals as a couple of Democratic senators is all it takes to kill a tax rate increase in that chamber.

Also, when the Fed raises interest rates, it tends to hurt banks more than individuals, given the recent bank collapses due to poor investments they could not divest from which in turn spurred bank runs from uninsured depositors. Individuals, at least those not with variable rate mortgages, are mostly not impacted as they can choose not to borrow at higher rates while they can reap higher rates from bonds and interest bearing accounts.

So, while there may be some merit to using tax rate increases to blunt inflation, they are next to impossible to implement and they hurt the wrong people/businesses.

[applegrove]

4. Tax cuts on the rich has resulted in too much money chasing too

Last edited Tue Mar 21, 2023, 02:53 PM - Edit history (1)

few investment opportunities. Why some hedge funds have gone into housing and caused inflation in the real estate markets. They also buy back stocks. That just means more and more money chasing too few opportunities.

[LonePirate]

5. I certainly agree. Targeted tax hikes among the wealthy and large capital businesses are needed.

[fescuerescue]

6. Has to be an across the board tax increase for everyone

Not just the middle class.

But if there is a corresponding spending increase, then it won't help inflation.

[Fiendish Thingy]

7. Yes indeed, but since the current congress is too cowardly to raise taxes

Interest hikes are the only tool available.