Young Research & Publishing Inc.

Investment Research Since 1978

Compensation was paid to utilize rankings. Click here to read full disclosure.

  • About Us
    • Contributors
    • Archives
    • Dick Young’s Safe America
    • The Final Richard C. Young’s Intelligence Report
    • You’ve Read The Last Issue of Intelligence Report, Now What?
    • Dick Young’s Research Key: Anecdotal Evidence Gathering
    • Crisis at Vanguard
  • Investment Analysis
    • Bonds
    • Currencies and Gold
    • Dividend Investing
    • ETFs & Funds
    • Investment Strategy
    • Retirement Investing
    • Stocks
    • The Efficient Frontier
  • Investment Counsel
  • Retirement Compounders®
  • Free Email Signup

Raise Taxes to Lower Inflation?

April 28, 2022 By Jeremy Jones, CFA

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.

Share this:

  • Email
  • Twitter
  • Facebook

You Might Also Like:

  • Liz Warren’s 158% Tax Rate
  • INCESSANT INFLATION: Government Destroying the Dollar and Prices
  • Democrats’ New Tax Starts With the Wealthy. So Did Income Taxes
  • Author
  • Recent Posts
Jeremy Jones, CFA
Jeremy Jones, CFA, CFP® is the Director of Research at Young Research & Publishing Inc., and the Chief Investment Officer at Richard C. Young & Co., Ltd. CNBC has ranked Richard C. Young & Co., Ltd. as one of the Top 100 Financial Advisors in the nation (2019-2022) Disclosure. Jeremy is also a contributing editor of youngresearch.com.
Latest posts by Jeremy Jones, CFA (see all)
  • Money Market Assets Hit Record High: $5.4 Trillion - May 26, 2023
  • The Mania in AI Stocks Has Arrived - May 25, 2023
  • The Wisdom of Sam Zell - May 24, 2023

Search Young Research

Most Popular

  • Wellington and Wellesley Funds Not Managed by Vanguard
  • The Single Worst Market Timing Event in History
  • “No Way I’m Spending That Much on Those”
  • Should America Move Closer to the Saudis, or Push them Away?
  • The War Machine's Manpower Problem
  • Vanguard Wellesley (VWINX) vs. Wellington (VWELX): Which Fund is Best?
  • The Power of a Compound Interest Table
  • Will the Fed Hold Up Its End of the Bargain?
  • “You Didn’t Eat That Again, Did You?”
  • Profits Becoming Elusive in China

Don’t Miss

Default Risk Among the Many Concerns with Annuities

Risk and Reward: An Efficient Frontier

How to be a Billionaire: Proven Strategies from the Titans of Wealth

Cryptocosm and Life After Google

Warning: Avoid Mutual Fund Year End Distributions

Is Gold a Good Long-term Investment?

How to Invest in Gold

Vanguard Wellington (VWELX): The Original Balanced Fund

What is the Best Gold ETF for Investing and Trading?

Procter & Gamble (PG) Stock: The Only True Dividend King

The Dividend King of the North

You’ll Love This if You’re Dreaming of an Active Retirement Life

The Importance of a Balanced Portfolio

Invest with Peace of Mind and Comfort

What Kind of Life Are You Investing For?

RSS The Latest at Richardcyoung.com

  • Bidenomics: Distrust of Public Officials and Institutions
  • Investing Habits of the Fairly Wealthy: #10 Powerball
  • “The Goal Is to Break Down the Individual”
  • Blackwater Founder Erik Prince a Hillsdale College Graduate
  • The Point to the GOP Debates
  • “The Economy Is Buried Under Trillions in Debt”
  • Will Desperate Democrats Replace Biden with Michelle or Hillary?
  • Your Survival Guy: “Life on Main Street Hasn’t Been This Hard in a While”
  • A Government of Control Freaks
  • The Elephant in the Room

RSS The Latest at Yoursurvivalguy.com

  • Investing Habits of the Fairly Wealthy: #10 Powerball
  • Your Survival Guy: “Life on Main Street Hasn’t Been This Hard in a While”
  • Your Retirement Life: Striped Bass Fishing off Block Island
  • “Then One Day the Grandfather was Gone”
  • How Joe Biden Raised Oil Prices
  • Is the Philadelphia Looting Spree the Wake-up Call America Needs?
  • “No Way I’m Spending That Much on Those”
  • What Trade Policy Serves America’s National Interest Best?
  • California Wants to Make the 2nd Amendment Unaffordable
  • “You Didn’t Eat That Again, Did You?”

About Us

  • About Young Research
  • Archives
  • Contributors

Our Partners

  • Richard C. Young & Co.
  • Richardcyoung.com

Copyright © 2023 | Terms & Conditions

loading Cancel
Post was not sent - check your email addresses!
Email check failed, please try again
Sorry, your blog cannot share posts by email.