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Okay, bear with me here:If tax is cut in a way that affects everyone, surely this causes an increase in inflation, thus making the tax cut disappear?
Then, with inflation going up, the cost of providing the services on what's left of the tax take also increases, so in absolute terms the reduction of revenue for the state is, in effect, more than intended?
How do you cut taxes without the money simply being swallowed up by inflation?
This blog is closed and has moved to http://Charlottegore.com. See you there!
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Can do, but if the government spends less then this has the opposite effect on inflation.
Many years ago I read somewhere that £10bn extra tax (unspent) had the same anti-inflationary effect as .25% on interest rates. Or maybe the numbers were different.
And I daresay this is all only a crude approximation to real life.
Inflation is taxation.
Its just hidden taxation which is why governments like it (until they lose control of it).
If the Government and the Public spend money on different things, wouldn't tax cuts disproportionately caused inflation on consumer goods - food, clothing, etc?
Whereas when the Government spends more it causes inflation on the kinds of things that Governments buy: Services, Building, Engineering...?
Charlotte, yes, in the short term. In the long term, capital and labour can move into the production of what is in more demand - in response to these inflated prices - and restore some equilibrium. I guess this means that 'shock therapy' change is not efficient. That 'creative destruction' is necessarily organic, and if you try to force it, as Thatcher and Yeltsin did, you just get destruction.
Tristan, I disagree that inflation is 'just' taxation. Certainly there is an element of taxation. But it also plays an important role in allowing prices to fall gradually in real terms where the market demands it, but where there are psychological or contractual obstacles to this happening in cash terms. I seem to recall a disagreement between Thatcher and Lawson on this point.
The "tax" of depreciation of currency held must be fairly trivial compared to the "bank charge" of depreciation of money held in current accounts.
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