How to stop inflation

November 16, 2021

I know how to stop inflation: raise taxes.

For the last 2 years, the federal government has been passing out enormous sums of money to help people and businesses through lock-downs, help state and local governments weather the loss of revenue, and pay for testing, vaccinations and hospitalizations. The government didn't have a reserve from which to draw that money; it was already running huge deficits. So it just printed it. That caused inflation, which has climbed to an annual rate of over 10%. (source)

Note: The government would prefer another term for "printing money". They call it "quantitative easing". I just learned this at a site called justfacts.com. QE is the creation of new money by the Federal Reserve. It is done only under special circumstances, such as the Great Recession of 2008 and now the Covid-19 pandemic. There was always the fear that QE would cause inflation, but it didn't happen during the Great Recession. This may have led economists and public officials to mistakenly think it would never do so. But there was a reason inflation remained low during and after the Great Recession: "Inflation likely remained low because the newly created money stayed in banks’ reserves and was not circulated into the economy." That is not the case for the QE in response to Covid-19. Most of the money is going into people's pockets.

Money to buy things normally comes from income from production in the form of wages, profits, interest and rents. When it doesn't come from production, there is no increase in goods and services to spend the extra money on. Demand outstrips supply, causing prices to increase.

The solution to inflation is to stop printing money and finance all spending with taxes or borrowing. Taxes are preferred because the national debt is already horrendous - $28.8 trillion. The annual interest on the debt is $300 billion, or $2400 per household.

We could even reduce prices back to what they were by taking as much money out of circulation as was printed.

One way to increase revenue would be to fully fund the IRS so that it can collect the $600-1000 billion a year that goes unpaid by tax cheats. At one point, the infrastructure bill just passed by Congress included $40 billion to do just that, but the Republics nixed it. (source) That will likely be the fate of any sensible solution; nevertheless, we persist.

A carbon tax would be a good solution if gas prices weren't already going up. It would have the added benefit of decreasing the greenhouse gases that are contributing to climate change and the destruction of the planet.

In the end, a well-crafted income tax is the fairest way to extract money from the population. I'd tax all income, but with personal exemption/deductions designed so that no tax is paid by individuals and families near the poverty level. I'd get rid of deductions for mortgage interest and charitable contributions. The tax rate would be progressive; those with higher incomes would pay more, but not so much as to feel punished. There would be no corporate tax; corporations would be required to immediately distribute all profits to shareholders so that it can be taxed as personal income. There would be no special rates for dividends or capital gains.

I realize that the G20 - the world's 20 biggest economies - just agreed on a minimum corporate tax of 15% starting in 2023. (source) That was to discourage countries from trying to attract corporations by offering low corporate taxes. Lowering the rate to zero would accomplish the same thing.

Some of the lost revenue from eliminating corporate taxes would be made up by eliminating the special rates on dividends and capital gains. The rest would have to come from individual taxes. Just about all of the corporate tax gets passed on to customers anyway, so the impact on individuals in general is minimal. It would, however, be shifted off the people with low incomes, which is a good thing.

One way or another, we are going to pay for reckless government spending. It is better to do so through a fair tax than through inflation.

By the way, I predicted this inflation back in March of last year.

Another voice:

Inflation is always and everywhere a matter of too much money chasing too few goods. So all you need to do to reduce the consumer price index is to take some of that money out of private hands. Typically, we leave this problem to the Federal Reserve to manage through monetary policy, and after a slow start it is beginning to act more aggressively. But if Biden really wanted to, the federal government could also theoretically attack inflation through fiscal policy, with some combination of tax hikes or spending cuts. Megan McArdle, Washington Post, May 16, 2022

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