DOES INCREASING TAXES DECREASE INFLATION?
Every time we talk about tax, it’s always a thin line between equality, fairness, and affordability. As a certified tax planner, people ask us- Do I have to pay tax? Is paying more tax punishment for being wealthy and successful? Or an unfair share for farmers struggling to catch up when milk prices are lower than the electricity and fuel bills? Rich, poor, old, young rural, and urban, are the questions many Americans ask when tax topics arise.
The Hidden Tax We Refuse To Admit
As a certified tax planners, we can’t also talk about tax without discussing inflation. Also called a hidden tax, inflation rises higher than dough on a hot summer with a current rate of 9.1%– the highest since November 1981. But, of course, we all know what happens when there’s inflation. It means that the prices of your average grocery list will increase, and the interest rate on the loan you took last week will increase.
This also means that a dollar won’t buy a dozen Krispy Kreme donuts like it did in 2018. Simply put, inflation reduces the purchasing power of your fixed income asset values and purchasing power. For the most part, inflation redistributes purchasing power from households and businesses to the federal government.
How about paying up the massive debt we all owe? As of February 2022, America’s national debt surpassed $30 trillion for the first time. Yet, for a long time since Reagan, levying higher taxes on corporate companies has always been the country’s solution to settling debts and controlling inflation.
What Drives Inflation?
Demand-pull inflation is caused by high consumer demand for goods and services. This widespread surge across the country tends to influence the increase in their prices. Sustained demand for specific goods and services can result in a raised cost for other similar goods, causing demand-pull inflation. Product consumption tends to increase when there’s a low employment rate and wage increase.
- Cost-push inflation is an increase in price due to higher production costs such as wages and raw materials. Cost-push inflation is usually reflected in major production inputs such as oil and copper. For example, suppose the price of oil rises. In that case, companies that depend hugely on oil for production might increase the price of their finished product, especially when it is highly demanded, making consumers pay for the higher cost of raw materials.
- Built-in inflation arises when workers demand higher wages to match the rising living cost. The result is the rise in the price of goods and services to offset the wage increase, thereby inducing a self-reinforcing knot between price increase and wage increase.
How Does A Higher Tax Rate Curb Inflation?
Increasing tax offers several benefits from creating additional government revenue to fund medicare and social security, balancing budgets to reduce debts, and redistributing wealth but does it curb inflation?
The American inflation crisis seems to be worsening, and no one has the answer to the bugging question, how will we tame inflation? By raising corporate tax still? Although by no means the most favorable method for controlling inflation, heavy taxation, also called the fiscal policy method, helps the government reduce inflation by increasing taxes such as VAT and income tax and cutting spending. Tax reduction helps to reduce demand in the economy and improve the government’s budget.
Heavy tax reduces inflation by reducing the pressure of aggregate demand, thereby causing an overall reduction in inflationary pressures while avoiding a recession. In addition, a higher tax rate reduces disposable income, compressing overall demand and eventually reducing inflation pressure.
On the other hand, higher tax rates discourage the average worker from taking extra hours and prevent employees from making proactive and productivity-enhancing decisions. Whichever way we look at it, most taxpayers will do whatever it takes to reduce their tax burden, which is why increasing taxes to control inflation is politically unpopular. Which corporate company wants to invest heavily in expansion and pay a hefty sum of the profit to the government? This is why we have certified tax planners.
Increasing taxescan help decrease inflation. Suppose the goal of increasing the tax rate is to support a better tax code that creates a fair margin without charging the average American workers a higher percentage of their income than the financially buoyant American. In that case, it’s a way out of the biting inflation in the country.
However, if it’s going to discourage both workers and corporations from growing and expanding, it means we might still bounce back to an uncontrollable inflation rate. The heavy tax strategy needs a balance that curbs inflation without stifling growth.
High tax rate? Low tax rate? Every business decision you make has tax implications, so you need a certified tax planner like Tax Goddess to help you save every penny you make without evading tax laws.
Does every penny matter to you? Then you have to make an appointment with Tax Goddess.