You might have missed yesterday’s editorial on inflation in the Guardian. This said:
Why should ordinary households be made poorer when a few groups operating at the top of the economy are driving so much of the price pressure?
The obvious solution to this would be for the Bank to ease off on interest rate rises and for the government to tax high earners. It is usually said of taxes on the rich that they don’t raise much money, but the objective here would be to dampen inflationary demand. The cash it would yield could go towards investing in green energy, so as to make the UK less reliant on rollercoaster fossil fuel prices. Higher taxes are unpopular – when they are on you. When they’re on someone else, on the other hand, they can be quite acceptable. If Mr Sunak is appalled by the idea of taxing his former workmates in the City, perhaps one of his opponents might take it up. Did someone mention the shadow chancellor, Rachel Reeves?
I do, of course, agree with the sentiment. Why not tax the wealthy more?
As Spud, his own glirousness, has been known to note. Taxing high earners doesn;t change their consumption. Because they earn enough to save. So, tax them more and they save less and maintain their consumption.
But it is consumption spending that drives inflation, not saving. So, taxing the rich more doesn’t reduce inflation. And that really is derived from what Murph has already told us.
You might have missed yesterday’s editorial on inflation in the Guardian.
Yes, but only by design.
Why does the “increase-taxes-to-reduce-inflation” argument always get immediately followed by “and-spend-the-proceeds-on-this, that or the other”?
It never seems to be followed by “and use the proceeds to reduce government debt”, which would at least makes sense as an inflation-reducing tool.
Yes but…
“Tax the rich” is perennially popular, mostly because most people’s definition of “rich” is “anybody who’s got more than me”.
” most people’s definition of “rich” is “anybody who’s got more than me”
I always say that people define ‘rich’ as 1.5 times their income, whatever the income is. That gives them some wriggle room in case they get a better job/pay increase etc.
Long before MMT arrived on the scene, the same point about the uselessness of taxing the rich was made by economist Steven Landsburg. A quote from his 2011 article followed by a link to the full article.
The Man Who Can’t Be Taxed
Nothing makes my job easier than a journalist who writes about something interesting and gets it 100% wrong.
Thanks, then, to Elizabeth Lesly Stevens for her column in yesterday’s Bay Citizen. Stevens wants to tax the “idle rich”, her Exhibit A being Robert Kendrick, heir to the $84 million Schlage Lock Company fortune. According to Ms. Stevens, Mr. Kendrick appears to do pretty much nothing but park and re-park his four cars all day long. Taxing people like Mr. Kendrick, she says, has to be part of any solution to America’s fiscal crisis.
Here’s what Ms. Stevens misses: Assuming the facts are as she states them, it is quite literally impossible to raise revenue by taxing the likes of Mr. Kendrick. We could argue about whether it’s desirable, but because it’s impossible, the discussion is moot.
Here’s why it’s impossible: For the government to consume more goods and services, somebody else must consume fewer. But Mr. Kendrick, by Ms. Stevens’s account, consumes almost no goods or services whatsoever. He just pushes cars around all day. His consumption can’t go much lower.
Ah, says Ms. Stevens — but there’s still that $84 million in the bank. Surely we can tax that, no? That, right there, is the heart of Ms. Steven’s confusion. She thinks that green pieces of paper, or a series of zeroes and ones in a bank computer, can somehow help supply the government’s demand for actual goods and services. It can’t.
So what happens if the government takes Mr. Kendrick’s $84 million away? Answer: A bunch of zeros and ones get shifted around on bank computers. Mr. Kendrick goes right on pushing his cars around. And nothing else has changed.
https://www.thebigquestions.com/2011/04/18/the-man-who-cant-be-taxed/
And there’s 84 million more dollars chasing the same supply of goods and services. Hence inflation.
Taxation causes inflation.
Paul, Somerset,
While its true that the 84 million dollars will cause inflation initially, the central bank will respond with higher interest rates which increases the flow of interest payments to the rich thereby driving inflation back down, in effect returning to them the money that was taken away in taxes. This is referred to as the “monetary offset”. In that sense, any money you take away from the rich simply boomerangs back to them. A couple of quotes from Scott Sumner:
For the 247th time, the fiscal multiplier is roughly zero
Keynesian economists have never been able to accept my assertion that the fiscal multiplier is roughly zero because the Fed steers the (nominal) economy. There’s a mental block on their part (or on my part from their perspective) that prevents us from seeing eye to eye on the issue, even if we agree on the need for monetary stimulus. —Scott Sumner
Monetary offset: Why is it so difficult to understand?
In this post I’m going to ask for your advice. I’d like to know why the public, and even the more sophisticated pundits, have so much trouble understanding monetary offset.
Of course the biggest mistake has to do with monetary offset. If fiscal policy becomes more expansionary, central banks will simply offset it.
I just found this Sumner article which I have not read that shows the monetary offset in a chart by Brad DeLong and Lawrence Summers. Here’s a link:
https://www.econlib.org/monetary-offset-is-more-mainstream-than-you-think/
As I commented on another thread a few days ago, why does me spending my money on want I want to spend it on cause inflation, but the Government
stealingtaxing my money from me and spending it it on what they want it spent on, not?I feel much the same Addolff.
As for the rich who are to be taxed, I’d say they’re anyone who’s not me. But I’ve always been a selfish bastard.
“why does me spending my money on want I want to spend it on cause inflation, but the Government stealing taxing my money from me and spending it it on what they want it spent on, not?”
The odd thing is that the Left’s usual explanation for why the rich should be taxed is that the rich don’t spend, so if the money is taxed and the State spends it, then you get more economic activity. Which of course means if you are taxing to reduce economic activity (and thus inflation) you need to tax people who have a very high propensity to spend. Which means you need to tax the poor not the rich……..
But hey, who ever said the Left cared about logic and facts? All their reasons are just a cover for their insatiable desire for power. The justifications can be 180 degrees opposed at various times, it matters not to them. All that matters to them is if it results in them getting the power.
Jim,
The odd thing is that the Left’s usual explanation for why the rich should be taxed is that the rich don’t spend, so if the money is taxed and the State spends it, then you get more economic activity.
While that’s true, the monetary offset compensates for that with interest rates lower than would otherwise be the case, as the following quote shows:
However, one of the contributions to the symposium, a paper by Atif Mian, Ludwig Straub, and Amir Sufi (2021), managed to make headlines in the New York Times and the Financial Times (amongst others). The authors argue that high income inequality is the cause, not the result, of the low natural rate of interest r* and high asset prices evident in recent years. “As the rich get richer in terms of income, it creates a saving glut,” Professor Mian told the New York Times, “The saving glut forces interest rates to fall, which makes the rich even wealthier. Inequality begets inequality. It is a vicious cycle, and we are stuck in it” (Irwin 2021). In the same New York Times article, Professor Sufi is quoted, saying “These forces pushing down r-star are probably so powerful that the Fed could never fight against them.” Thus, central bankers are “in this story, […] the equivalent of drivers on a highway who must adapt their speed to road conditions. The Fed has kept rates low for the past decade because those rates have been the ones that keep the economy stable. If it had tried to push them higher, the result would have been a recession.” (Irwin 2021) This message must have been music to the ears of the beleaguered central bankers, and balm for their troubled souls, because, if true, it absolves them from the responsibility for having landed the economy in the catch-22 of low interest rates, excessive indebtedness, and over-inflated asset prices.
The quote above is from Naked Capitalism, titled: Why the Rich Get Richer and Interest Rates Go Down
https://www.nakedcapitalism.com/2021/09/why-the-rich-get-richer-and-interest-rates-go-down.html
There are two links in the above quote. The New York Times article is titled: Some Say Low Interest Rates Cause Inequality. What if It’s the Reverse?
https://www.nytimes.com/2021/08/28/upshot/low-interest-rates.html
The Financial Times article is titled: The rich get richer and rates get lower
https://www.ft.com/content/256acf1b-5bbb-475b-9df3-6d0b3a59389a