Fight inflation with tax increases?

So, I hear that tax increases are a tool for fighting inflation. Would you agree to a tax increase if it combats the recent inflation that we are suffering from the Democrat's stimulus checks? Fight inflation with tax increases? Would it work? Would you support it?

Not I, who would support a tax increase on myself, but supposedly tax increases will help.

 

Wouldn't work because then the government would just spend it again. The only meaningful way to take money out of circulation is to have the fed sell bonds and sit on the cash instead of giving it to the government to spend.

 

Oh, I think the Fed just stopped doing that recently. It would be bad news if that was the wrong decision and they have to restart the program.

 

I personally am of the opinion that DC wants to create a lot of inflation so they can claim the economy has recovered and is growing at record rates. They have had a history of understating inflation by switching out goods in the CPI basket for a generation. Don't expect them to stop now. It started with the great social security "fix" during Reagan's years and has only gotten worse IMHO. By understating inflation, they are over stating growth.

 

Where did you hear this?

 

You heard incorrectly, or heard it from a non-starter.

There are four different types of Inflation, each with their own unique cause and each with their own unique solution.

They are: Monetary Inflation, Demand-pull Inflation, Cost-push Inflation and Wage Inflation.

For example, Wage Inflation occurs when the Demand for a small percentage of the 800+ skill-sets the Department of Labor has identified abruptly increases resulting in extraordinary wage increases which drive up prices.

That has happened twice in your history. Neither Congress nor the Federal Reserve caused it, although non-starters will froth at the mouth screaming, "The Fed!" until they pee themselves.

Nothing need be done. The Free Market will correct the shortage of workers in the affected fields, albeit over the mid-term, meaning 3-10 years.

Since the Sheeple insist that something be done now, now, baby now, right this second, FDR and Nixon levied a Wage & Price Freeze, which was the incorrect course of action. Levying a price freeze only would have been justified, but not the wage freeze.

You still suffer from FDR's gross malfeasance today, because it was his Wage & Price Freeze that gave employers the power to lord over your health plan coverage.

Monetary Inflation is caused by Congress, the central bank (the Federal Reserve), or both. Both have the power to eliminate it. Congress can raise taxes and/or decrease spending and/or the Federal Reserve can raise interest rates and/or decrease the money supply.

Historically, your government has employed a combination of those (excluding decreasing spending) to successfully combat Monetary Inflation.

Again, this is something that happens over the mid-term, meaning 3-10 years to reach the desired goals.

Demand-pull Inflation is all you. You being consumers. You and you alone are the cause of Demand-pull Inflation which is what you are experiencing now.

You have only 3 options to stop Demand-pull Inflation:

1) Stop consuming everything like a bunch of locusts; or
2) Seek substitutes; or
3) Increase Supply of the affected goods, services and resources that have higher prices.

You can readily tell the difference between Monetary Inflation and Demand-pull Inflation.

Monetary Inflation affects the price of everything, as in every thing, as in every single thing, as in every single ****** thing, as in every single ****** thing including the kitchen sink.

Yes, everything includes wages/salaries.

Demand-pull Inflation only affects those goods, services and resources where Demand exceeds Supply, or Supply has decreased while Demand remains constant or increases.

Neither Congress nor the Federal Reserve has anything to do with that.

In theory, Congress could raise taxes to combat Demand-pull Inflation, but it has never done that for several reasons.

Note that the tax increases must be targeted solely at the Middle and Lower Classes and not "the Rich" because it is the Middle and Lower Classes that cause Demand-pull Inflation.

You need to decrease the disposable income of the Middle and Lower Classes to reduce their consumption which lowers Demand resulting in price decreases.

That's very risky for several reasons:

1) It's an economy, not a train. It doesn't run on a schedule. It could take 9-15 months before there's any effect.
2) By reducing the disposable income of the Middle and Lower Classes you force them to seek substitutes. That would create high Demand for substitutes and if there are Supply issues, then all you've done is create Demand-pull Inflation for the substitutes.
3) There are other potential negative consequences.

Your lack of understanding is grotesque.

The CPI (CPI-U or CPI-W) is an aggregate of all forms of Inflation.

Let's assume 2.5% "Inflation" is reported for September. That would be something like:

0.2% Monetary Inflation + 0.1% Cost-push Inflation + 2.2% Demand-pull Inflation = 2.5% Inflation.

A tax increase will not make the oil service workers who are working 10-12 hours a day to restart the 1,000s of oil and natural gas wells that were shut down due to low Demand work faster.

It will not make loggers work faster to restart logging operations and lumber mills that were shut down due to low Demand.

It will not fix the disarray in your Supply Chain caused by the shut down.

It's an economy, not a video game. You don't restart it with a mouse-click.

Everybody needs to suck it up and stop panicking.

 

It’s actually a great tool to fight inflation. So is higher interest rates. Both of which I expect to happen. Not happy about it but it is better than hyper inflation

 

My economics textbook. I'm taking a class.

I have no idea if the text will walk it back in later chapters, where it tackles controversial topics, but that's the way it is now.

 

Macroeconomics for Today 9th Edition
Irvin B. Tucker University of North Carolina Charlotte

 

Interesting. I can see taxes being used to speedup or slow down economic growth but as inflationary control, that method is extremely "indirect" and "unfocused". Regardless, something to ponder.

 

Thinking only about the business side and the cost of goods, increased taxes on a business are a cost of doing business and passed on to the consumer in the price of their goods and services. This would increase inflation.

On the consumer side, more taxation means less money to spend, means less demand on consumer products, should mean lower prices and lower inflation. If the government subsequently spends the increased tax revenues I suspect there will be no change to inflation rates...

 

I'm not sure raising taxes while consumers are playing inflated prices would be a good idea.

 

Theoretically taxes could be used to fight inflation, but we also have to remember that inflation is like a sort of tax itself. When tax rates rise too high, it can begin doing things to the economy that are not good.

Maybe the government should be fighting inflation by collecting the money it spends through taxes, rather than printing it.

 

The bolded just depends. Higher taxes can reduce the supply of goods being manufactured which can then worsen inflation. Consumers are not a bottomless well. The ability to do a direct forward shift of taxes onto consumers varies with how elastic the price for the product is. You can't do a lot to escape needing gas, for instance, but if Cambell's does this with their soup, more people will buy off brand soup, make their own, or eat something else instead. If Campbell's soup demand falls, they then will stop making as much which causes them to have to price their products even higher to spread their fixed costs over fewer units or get rid of more workers to reduce their costs, which then worsens inflation, rinse and repeat until a new equilibrium is found.

 

I think it depends on what the government does along with the increased revenue. If the government grows its spending with new programs using its increased revenue, then those tax increases will not slow down inflation because the government is taking that revenue and putting it right back into the economy, and they are continuing to borrow hundreds of billions of dollars to make the budget balance.

On the other hand, if the government does not grow its spending, and it uses the increased revenue to balance the budget for existing programs, this would result in less borrowing. If they actually balanced the budget with tax revenue, there would be no need to borrow those hundreds of billions of dollars and throw them into the economy. It would follow that there would then be less inflation.

 

I agree with the premise but since we are consumers on steroids I suspect the demand will always exist. Even with gas when prices escalate some will find alternate transportation but the second gas prices reduce they are back to normal consumption...

 

Only in a fairy-tale world will government ever reduce it's spending...politically those representatives who don't bring home the bacon will be out of a job...

 

I don't know that we are these days. I got out of the habit of splurging on everything at least during covid. Ended up paying off a couple credit cards, putting a better than I normally would down payment on a new car (that I bought out of necessity when a cylinder died in my old one), played in the stock market (which I just started doing again a little) and banked almost $10K. I think the poorer people with all their free money are spending like drunken sailors, but not sure people who are used to having money are.

 

Yeah I learned in first year economics that the inflation can be regulated with tax increases and decreases.

Inflation can also be affected through the increase or decrease of wages.

Since there is a lot of partisan bickering surrounding these two ideas the idea of using them to regulate the economy is often overlooked.

 

Well, that's not really entirely true. If the government collects that money in taxes and then dumps it back into the economy through spending, it doesn't really help reduce inflation. (Well, not so much)

 

That depends very much on how those wages are increased or decreased, exactly what policy is taken to increase or decrease them.

I believe it's a logical fallacy to just say something as a generalization and then accept it as a fact and try to use that in another logical thought without remembering the reasons why there is an association between the two in the first place.

That type of piecemeal logic is often in error.

 

I would agree with you but there are many historical examples. Sorry if it doesn’t fit your partisan view of the world.

 

Where do you hear this and in what context?

 

I read it in an economics textbook when I took an economics course a few weeks ago.

 

via wage increases

if you make more, yes, you pay taxes on more dollars