After jamming an unneeded stimulus program through congress and turbo charging inflation, Biden and his allies on the left have come up with a plan solve the inflation problem they helped create. They want to raise your taxes. The WSJ points out the folly in such an approach.
The same policy wizards who brought you soaring inflation are now offering what they claim is a solution to inflation: Raise taxes. Our advice is to consider the source and the economic record their previous advice produced.
Democrats are desperate to salvage something from their Build Back Better agenda after Joe Manchin killed the original version last year. Sen. Manchin’s complaint then was that trillions of dollars in new spending would stoke inflation. Voila, Senate Majority Leader Chuck Schumer is now pitching a tax increase as a cure for price increases.
“If you want to get rid of inflation, the only way to do it is to undo a lot of the Trump tax cuts and raise rates,” Mr. Schumer said after a meeting this week with Mr. Manchin. The West Virginian may agree. “We talked about the tax code and doing something to combat inflation. He is just as concerned about inflation as I am,” he said after their chat.
This argument is probably mere political expedience—any pitch in a storm to convince Mr. Manchin. But to the extent it’s serious, the idea is one tenet of the Modern Monetary Theory school that is fashionable on the left.
“Coordinating higher government spending with higher taxes so that the rest of us are forced to cut back a little to create room for additional government spending,” as MMT evangelist Stephanie Kelton puts it. She says the trick is to “remove spending power from the rest of us” via taxes so the government can fund things like solar panels in California.
This is the same theory that told us the government can spend whatever it wants and not worry about rising prices. The Federal Reserve can simply keep suppressing interest rates and finance whatever politicians spend. Well, Congress and the Fed took Ms. Kelton’s advice, and here we are with the highest inflation in 40 years.
The raise-taxes strategy gets the inflation dilemma exactly backward. Congress and the Federal Reserve pumped up demand for two years to the point that supply couldn’t keep up. The Fed is finally doing its part to suppress demand by belatedly raising interest rates and planning to trim its balance sheet. The main cure for inflation is better monetary policy.
But tax increases would make inflation worse by further suppressing the supply side of the economy. That’s especially true of the corporate tax increases that Mr. Schumer is pitching. They’d suppress productive investment precisely when the economy needs it to offset the Fed’s tighter money. This is what happened in the 1960s and ’70s when higher taxes on corporate profits and individual incomes contributed to inflation by depressing investment and productivity growth.
The economic solution to inflation that finally worked arrived in the 1980s with economist Robert Mundell’s policy mix of tighter money to target inflation and tax cuts to re-ignite animal spirits and faster growth. The Reagan boom followed. The 2017 Tax Cuts and Jobs Act also triggered productive investment while inflation remained subdued until 2021.
The only way a tax increase could reduce inflation is if it pushes a slowing economy into recession. We doubt that’s the inflation solution Democrats have in mind.
