In looking at the future of tax cuts in NZ I linked to Oliver Hartwich, who argued that our very poor fiscal situation had to be improved first. Included in that argument were several reasons, including an argument that tax cuts would fuel inflation, or more precisely, “They would complicate efforts to bring inflation under control.”. He doesn’t say exactly how but presumably he’s referring to Milton Friedman’s point about government spending doing it, although that implies it’s really the spending that needs to be cut.
But this actually lines up somewhat with another argument against tax cuts that has appeared mainly on the left, with the likes of Chris Trotter, The Standard and The Daily Blog, where they claiming that tax cuts will make our inflation even worse as extra money appears in the pockets of people who will then go and blow it on consumer items, thus bidding up their prices.
But when even Trotter understands that inflation is too much money chasing too few goods and services you’d think he’d see the obvious flaw in that argument, for which I’ll quote Friedman again:
Having the money supply growing faster than the supply of goods and services is something we’ve had on steroids here since Chinese Lung Rot hit the country, where the supply of goods and services didn’t just fail to grow but actually got crunched by lockdowns and all the problems of re-starting the private sector economy, especially with supply chains – while huge amounts of increased government spending were blown into that economy just to keep it ticking over, and then also to supposedly help it be unlocked.
It’s usually only the money supply being affected by government policy, and for once there was a rational excuse for what Left-wing governments always want to do anyway. Also, to be fair to Labour it’s pretty much what every idiot government in the Western world did, irrespective of Left-Right ideology, when all that needed to happen was to lift the lockdowns and let the economy come roaring back. The US certainly did not need more multi-trillion spending bills passed in late 2020 for Trump to sign and 2021 and beyond by Biden, but that’s pollies for you.
As such anybody should be able to understand that tax cuts are therefore not increasing the supply of money. By definition all they’re doing is simply re-allocating part of that supply, shifting it from the government to private companies and people, where the decisions on what to do with it may be different.
And given our private debt situation people are going to do something different to government; they’re going pay down debt first before they “blow” the tax savings on buying more stuff.
Why? Well you know the answer: because debt of all kinds, credit cards, cars and mortgages, are hurting people badly with the high interest rates required to squash inflation, thanks to that fat idiot running the Reserve Bank and being lax on the whole thing even as the last idiot government went wild with increased spending.
By contrast we’re not likely to see that money being used for debt reduction by governments of any stripe any time soon: the current National government has effectively told us so. And even if the private sector decision is to spend it instead, where’s the evidence that it would be any more inflationary than government spending, even if you ignore the common economics consensus around Friedman’s money supply theory.
Finally, history shows us that the massive US tax cuts of 1921-22 did not spark inflation, nor did the smaller tax cuts of JFK in 1961-62, nor Reagan’s in the early 1980’s, the Bush tax cuts in the early 2000’s, and the Trump tax cuts of 2017. In fact in the case of the Kennedy, Bush and Trump tax cuts inflation remained low and stable, while in the early 20’s and early 80’s it actually declined.
So no. Tax cuts are not going to cause inflation.
In fact, if they were done like those of West Germany in 1948, they could make our economy take off.
The Freiburg approach was not laissez-faire: government was to be active in promoting competition and protecting free markets from monopoly, public or private. It also allowed for a small degree of wealth redistribution through graduated income taxation and social welfare programs, but it was insistent on keeping tax rates low enough to prevent economic disincentives to productive effort.
And if you wanted to be even more radical you’d take a look at Says Law and why it explains that we don’t need a job-killing recession to kill price inflation.
No Minister 