Americans face an inflation crisis—prices are rising at the fastest pace in forty years. A combination of excessive government spending from President Biden’s American Rescue Plan, genuine supply chain problems, and energy policy that has increased our sensitivity to Putin’s war on Ukraine has caused inflation to rise the fastest in 40 years, 8.5%, about four times faster than the Federal Reserve’s target.
Inflation is a burden on nearly everyone, sapping purchasing power from those on fixed incomes, and even though wages are rising at a fast pace of over 5%, for many, incomes are not rising as fast as expenses. One person who deserves significant credit for anticipating the inflation problem is Senator Joe Manchin, who torpedoed Biden’s “Build Back Better” tax and spend bonanza over inflation concerns in December. If he hadn’t, the inflation outlook would be even worse.
While Manchin deserves credit for bucking his party, there are deeply concerning reports that there are renewed talks over a smaller reconciliation bill that will include “deficit reduction” by raising taxes more than spending to address Manchin’s concerns. This however will only exacerbate Americans’ cost of living problems.
Inflation measures the changes in prices of goods and services you buy—everything from gasoline to college textbooks. The thinking is that by raising taxes Americans will have less money left with which to buy those goods and services, reducing demand and bringing prices back under control. However, taxes are essentially the cost of citizenship; raising taxes makes it more expensive to be a citizen—a hidden form of inflation.
So if a household that used to have $100,000 in after-tax income has their taxes go up by 1%, that’s $1,000 less they can spend. Unless the prices of the products they buy fall by 1% they can’t buy as much for every dollar of pre-tax income they earned. It may not be “inflation” as measured by government statistics, but higher taxes have the same impact of eroding your purchasing power.
Now of course, some on the Left will protest that the taxes under discussion will only impact the wealthy and greedy corporations, so this concern is unfounded. That couldn’t be further from the truth. Somehow, the very same people who think corporations are “greedy” think they will happily pay the higher tax bill and reduce shareholder profits rather than pass on that price increase to consumers.
This not only defies logic but also empirical evidence. When the 2017 tax cuts were passed, many warned that Republicans were going to overheat the economy. At the end of 2017, core PCE (the Federal Reserve’s key inflation measure) was at 1.7%, and the Fed expected it to rise to 2%. Instead, two years later, it was still 1.7%. This came even though unemployment fell to 3.5% before COVID—0.4% below the Fed expected.
The economy outperformed expectations, and inflation stayed even lower than forecast. Why? Because cutting taxes on corporations allowed them to keep prices low even as wages rose. Pre-tax profits as a share of GDP actually declined from 2017 to 2019 because a lower tax burden meant fewer pre-tax profits were needed to provide shareholders a sufficient after-tax return.
Just as we learned corporate tax cuts help to alleviate inflation pressure, reversing course and raising corporate taxes now will lead to higher inflation. So if you buy anything, even if you make under $250k, you will see your purchasing power erode even if your personal income tax rate is unchanged.
The question is whether Democrats merely want to impact the headline inflation number or actually address the cost-of-living crisis. Higher-income taxes effectively raise the cost of citizenship while corporate tax increases the risk of increasing the prices you pay for goods and services as companies seek to protect profits.
A “Build Back Better” bill that raises taxes more than spending will slow economic growth while prolonging the inflation problem, and it needs to be opposed vociferously. We are still paying for the recklessness of last year’s $1.9 trillion spending splurge, adding a tax hike on top will be salt on the wound and leave Americans worse off. Just as Senator Manchin wisely opposed BBB last year; he should oppose its reincarnated carcass this year.
If Biden truly wanted to reduce inflation, he’d push to build out domestic industry and transportation networks, increase oil and gas production, and make it easier to build more housing. Instead, they want to raise taxes, and Americans would suffer for it.
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