When taxes cause inflation

Much stricter Congressional oversight of the bureaucracy is absolutely critical to maintaining the balance of powers in our government.  Photo: Cliff Owens / AP

WASHINGTON, December 26, 2013 — The federal deficit is out of control and the Democrats want to raise taxes. They don’t understand that excess taxes and regulations are the reason the economy is taking so long to recover. There are some basic things they should understand about taxes.

The first is where taxes come from. Government revenues are skimmed from personal and businesses income. The government uses tax revenues to fund services to the citizens of the country. Many of those are useful and legitimate, such as national defense, law enforcement, tax collection, public works and others authorized by the United States Constitution.


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So, why do taxes contribute to inflation, and why does inflation matter?

Inflation is the worst kind of taxation. Government takes money from private individuals and companies in order to pay for its services. The delivery mechanism is bureaucracy. When the costs of bureaucracy outpace what the profit-making businesses can efficiently produce, government demand drives up prices, the definition of inflation.

Government competes with the private sector for available goods and services. Those, however, are increasingly limited because businesses require capital in order to produce them, and government taxation has decreased the amount of capital available to businesses.

When the government’s demands are unmet due to reduced buying power, what does the government do? It raises taxes. This causes even more inflation, and so goes the cycle, the cycle Americans are now in.


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When demand exceeds supply, inflation follows.       

This result applies to money distributed by government through its various programs, whether directly through gifts to individuals or to favored businesses, or indirectly through tax credits of various kinds. The reason there are so many giveaway programs in government in the first place is because politicians use these popular gifts to get elected.

If, as claimed by advocates of such programs, the government’s largesse is spent by those who receive it, it increases demand for goods produced by private firms. Thus it increases prices — it produces inflation — because the demand side of the equation further exceeds the supply of goods and services available. This inflation, in turn, leads to higher taxes so the bureaucracy can continue its services.

The net fiscal effect of government giveaways is neutral at best, and the social cost of making more citizens dependent on the government will eventually become disastrous. Rising taxes weaken the private sector on which government depends for all its income, since government is not ultimately the source of the wealth — the resources — it expends.


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The principal victims of inflation are the middle class. The rich can more easily protect their investments because inflation has raised the values of those investments in tandem with the overall inflation. The poor had nothing to lose in the first place and may realize modest personal gains from government’s giveaway programs.

It is the middle class, living on their static payroll or pension checks while prices continue to escalate, who truly suffer. Even cost of living adjustments (COLA’s) do not alleviate their slowly shrinking standard of living. The so-called “market basket of purchases” on which the COLA is nominally based does not include many of the items that consume a middle-class family’s income: transportation, tuition, surgeries, food, and so on. 

We are being told that there is very little inflation in the economy, but any household in America knows otherwise. Between 1973 and 2011, the purchasing power of the dollar declined 85 percent. That is what inflation does to paychecks.

So, how we can avoid the looming catastrophe of Big and Bigger government? The obvious answer is to reduce government spending. Attacking the problem at its end point — the U.S. debt ceiling — seems pointless, since those funds have already been obligated. A true U.S. default would plunge the entire world into severe depression, and abandonment of the dollar alone would cause catastrophic inflation in the United States.

The only way to truly reduce federal spending is for the appropriate committees of Congress to follow the example of President Calvin Coolidge. He sat down with his Treasury Secretary, Andrew Mellon, and went through every line of the federal budget. They found so much waste and duplication that they were able to reduce taxes every year they were in office. Coolidge’s goal was to eliminate federal taxes for the workingman altogether — and he succeeded.     

The federal budget today is too large and too complicated for any two people to master. However, 535 members of Congress and their staffs should be able to do the job. They can always bring in outside help if they need it, starting with the Congressional Budget Office.

If they fail, the Executive branch of government can rule with few limitations on its powers, as we are seeing in this administration. No other group of people in the entire country has both the mandate of oversight and the resources to do the job. The inflationary cycle America has been in for most of the past 50 years has been caused primarily the failure of Congress to do its job, relegating it instead to the Executive branch.

The proverbial “waste and abuse” have to be discovered and discarded before taxes are spent, not after. Much cost reduction can and should be done before tampering with entitlements.  Entitlement reform is necessary, but it isn’t going to be done while the Democrats are so dead set against it. Nobody, however, is against eliminating waste and abuse.

With all the scandals of the current administration fresh in the minds of the nation, this is a good time for Congress to initiate the scrubbing process. Certainly neither the Justice Department, the State Department, the Internal Revenue Service, the National Security Agency, Homeland Security, nor Health and Human Services are in any position to seek popular support against a budget blitz by the appropriate congressional committees.

This is a task which will have a real — and popular — result, unlike many of the other tasks that have occupied Congress in recent years.

Congress, forget the lobbyists and the PAC’s and get to work. Much stricter congressional oversight of the bureaucracy is absolutely critical to maintaining the balance of powers in our government.  


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Lawrence J. Fedewa

Lawrence J. Fedewa is author, publisher, and speaker, he has addressed international audiences on both technical issues and events of the day. He is also a Contributing Editor for “A Line of Sight" magazine.

Lawrence J. Fedewa has worked with railroads, less-developed countries, and labor unions as a management consultant, and with professors, managers, politicians, and teachers. 

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