Paul L. Caron

Thursday, October 6, 2022

NY Times Op-Ed: A Progressive Consumption Tax Could Help With Inflation

New York Times Op-Ed:  There Is a Tax That Could Help With Inflation, by Ezra Klein:

Inflation often begins as a mismatch of supply and demand. But if people get accustomed to prices rising, then inflation becomes about expectations. And so the task of ending it grows fuzzier: You need to use policy not just to manage the economy but also to alter psychology. The arid language of economics obscures the brutality this demands. You need to hit the economy hard enough to cow everyone who makes decisions within it. ...

What the Fed can do quickly is cut demand by raising interest rates. That, too, can change expectations: If businesses think their customers will have less money next year than they do this year, they will price more cautiously. But again, let’s not mince words. The Fed drives down demand by making it harder to borrow money and harder to afford homes, and by throwing people out of work. “We have got to get inflation behind us,” Jerome Powell, the chairman of the Federal Reserve, said in September. “I wish there were a painless way to do that; there isn’t.” ...

It would be nice to have policies that could work alongside interest rates so adjustments could be less severe. It would be particularly nice to have a policy that targeted the rich rather than the poor and did so in a way that didn’t hurt long-term investment. Such a policy exists.

For years, Robert Frank, an economist at Cornell, has argued for a progressive consumption tax on the ground that it would discourage the rich from spending on luxuries and give them more reason to save and invest.

The way it works is simple: Instead of reporting your income to the I.R.S. and being taxed on that, you report your income minus your savings, and you’re taxed on that. That’s a consumption tax: Your taxable income is what you spend, not what you save. Congress can make it progressive by adding a hefty standard deduction and applying a much higher tax rate to people making much more money, just as we do now. ...

I’ve always liked Frank’s argument, but now I’m more interested in another feature of the progressive consumption tax: the ability to dial it up and down to respond to different economic conditions. In a time of recession, we could drop taxes on new spending, giving the rich and poor alike more reason to spend. In times of inflation, we could raise taxes on new spending, particularly among the wealthy, giving them a concrete reason to cut back immediately and to save and invest more at the same time.

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