Commentary
The narrative to attack any tax cut and defend any increase in government size is reaching feverish levels. However, we must continue to remind citizens that the constant bloating of government spending and the increasing of the size of monetary interventions are some of the causes of the widespread impoverishment of the middle class. Constantly increasing taxes and diminishing the purchasing power of the currency is wiping out the middle class in most developed nations.Currency printing isn’t neutral, and it never is. It disproportionately benefits the government and massively hurts real salaries and deposit savings. It’s a massive transfer of wealth from savers to the indebted.
Readers may say that what needs to happen is the taxation of the rich and corporations and all will be solved. Why do you think that many of the ultra-wealthy are extremely happy with financial repression, the issuing of more currency, cutting rates, and higher taxes? Because the net effect is positive for them and negative for you. Financial repression is a tool that makes it more difficult for the middle class to be richer and therefore wipes out private savings and any possible competition at the top.
The latest dogma is that tax cuts are negative because they boost inflation. However, it’s yet another fallacy predicated on the idea that money is better off in the pocket of the government.
Inflation is the destruction of the purchasing power of a currency, not “rising prices.” Prices don’t rise in unison due to an exogenous factor like a war unless the quantity of currency issued is higher than the growth in the productive sector.
Government spending weighs close to 50 percent of GDP in most developed economies. One unit of currency in the pocket of the government is certainly spent and even multiplied, as most of the public sector will spend that unit of currency and more via deficit.
Cutting taxes doesn’t add units of currency to the economy. It’s the same quantity of currency only a bit more in the pocket of those who earned it.
When governments reduce taxes, the citizens and businesses that have earned money have more in their pockets. Some might spend it, others might save it, which means investment, and others might take more credit. Tax cuts are only inflationary if they boost an extraordinary and unjustified credit impulse. This is rarely if ever the case.
A unit of currency in the hands of government is certainly going to be spent, adding even more money into the system via debt and deficits. A unit of currency in the hands of those who earned it isn’t just likely to lead to a better capital allocation, it’s also fair.
Tax cuts in an inflationary environment aren’t just logical and just, but necessary, because most governments don’t deflate their tax receipts, and, by keeping monetary tax rates untouched, receipts rise and the amount of taxes paid by citizens increases.
Inflation is a tax and a policy. Governments benefit from inflation, collecting higher receipts due to the inflation impact on tax revenues, while citizens suffer elevated prices, higher direct and indirect taxation, and lower real wages.
If increasing the size of government is always dangerous, it’s even more perilous in times of high inflation because the risk of malinvestment becomes a certainty.
There has been a massive campaign against any tax cuts all over the world that adds to the view that all government spending is justified. The concepts of efficiency, saving, and prioritization have been abandoned, and the administrative state is perceived as an entity that can’t perform any of those measures and needs constantly rising revenues to undertake its duties, yet all is false.
Taxes aren’t set because the government needs more revenues, but to pay for services and are adjusted to the reality of the economy. When the public sector becomes an all-consuming and never-saving entity it doesn’t contribute to growth and productivity, it prevents it.
Governments use any excuse to increase their size in the economy, and using constant emergencies or alleged crises is the easiest way to advance a confiscatory and extractive view of the economy where citizens and businesses are viewed as cash machines for the political sector, and where the private sector is at the service of the government and not the other way around.
Tax cuts don’t increase inflation—it’s the giving of a bit more of the existing money to the ones who earned it. What increases inflation, always, is bloating government spending, perpetuating deficits, and then monetizing it by printing constantly depreciated currencies.
Government spending isn’t the engine of the economy. Tax hikes aren’t the only solution to bad administrations. Printing money isn’t a tool for growth, but one for cronyism. Upside-down economics doesn’t work. We need to return to monetary and fiscal sanity. A tax wedge of almost 40 percent of income isn’t normal: It’s confiscatory.
If we want to reduce inflation, we need to limit the uncontrolled policies of those that create it: central banks and governments.
