We have some longer or deeper things we are trying to work on but folks keep writing foolish things that need to be dealt with. In this case it is Jeff Spross at The Week. The Week appears to be a serious publication with, one would think, editors. How, then, did Jeff’s “How The Democrats Can Raise Taxes Without Technically Raising Taxes” end up on The Week? We don’t know.
Jeff sets up the article by discussing that the The Donald’s administration decided not to index capital gains for inflation. Then he says:
But Democrats — or anyone, really — should take a hint from Trump’s decision. It’s not just that capital gains shouldn’t be indexed to inflation; income taxes shouldn’t be either.
Doing away with that indexing would raise plenty of new revenue for the government. But more fundamentally, it would fix a basic misunderstanding about good macroeconomic policy. [Emphasis added]
Jeff is serious. And he is seriously wrong.
Sidebar One: Jeff has no comment on the standard deduction which is also currently adjusted for inflation. End Sidebar One.
It doesn’t seem to us that “You are paying more taxes but we didn’t really raise your taxes” is much of a rallying cry for any party. The more serious problem is Jeff’s understanding inflation. Here is Milton Friedman explaining that inflation is a monetary phenomenon. In the United States, Milton tells us, inflation is made in Washington DC.
Sidebar Two: If you want you can now discuss the extent to which the Federal Reserve, which controls the money supply and hence inflation is independent within the government. You can come back to that discussion later as it might take a really long time. End Sidebar Two.
Jeff doesn’t agree with Milton. Jeff thinks inflation is caused by supply-demand problems. Jeff says that we need higher taxes as a brake on an overheated economy:
Here’s the problem with that logic: If your economy is experiencing high inflation, like what we went through in 1980, then it needs to slow down. Mainstream macroeconomics assumes that high inflation is evidence of an overheating economy: too much demand chasing too little supply. In which case, to cool inflation off, money needs to be taken out of the economy. And taxes are one tool for doing just that. [Emphasis added]
There is a big problem with Jeff’s example. We checked the economic data for 1980 at The Balance.com where they have unemployment at year end, GDP growth, and inflation by year on one page. It was really easy to find and somebody at The Week should have checked. At the end of 1980 the unemployment rate was 7.2 percent, GDP growth was negative signaling a recession, and inflation was 12.5 percent. So Jeff’s example contradicts his theory. Rather than the economy being overheated it was in recession. How about Venezuela? Nope. Zimbabwe? Nope and you can even use the same cite for that and more.
Few people have been more exactly wrong than Jeff when he says that indexing income tax brackets is pro-inflation:
By contrast, brackets that are indexed to rise with the price level are essentially pro-inflation. As the inflation rate increases, the rate at which the bracket thresholds rise increases as well. That’s a fiscal stimulus added to the economy right when it’s already running too hot. In fact, Russel Long, a Democratic senator from Louisiana at the time, made this exact point, arguing indexing would “make inflation worse by pumping more money into circulation at a time inflation is at its worst.” [Emphasis added}
Inflation is at best independent of real economic growth. What makes Jeff so wrong is that the government (see Sidebar Two above) controls inflation. To have the government benefit from inflation by increasing receipts from bracket creep is a really bad incentive for folks who want to avoid inflation. Hint: that should be almost everyone. Indexing brackets is strongly anti-inflation because the folks that control inflation, the government, have fewer incentives to inflate. It is really important that inflation indexing for brackets and standard deductions stay. It is also really important to check the data that you rely on.