Inflation is the word on everyone’s lips. They should get used to saying it, because if President Biden’s economic and tax agenda is fully implemented, we’ll be seeing a lot more of it in the months and years to come.
The irony of course is that Biden’s inflationary policies are ostensibly designed to help middle class and working people. In reality, they will cause serious economic hardship and suffering.
In principle, inflation is when the value of a currency, in our case the dollar, decreases and the purchasing power of the currency is reduced. In practice, it means that everything gets more expensive for everyone — in some cases drastically so.
Obviously, working people and the middle class suffer most when inflation skyrockets. But what causes inflation? Bad government policies do, and the policies being promoted by the Biden administration are a guaranteed formula for causing even worse inflation that will be with us for a long time.
First there’s the out of control spending. Just two of Biden’s proposed plans — the American Jobs Plan and the American Families Plan — come with a combined price tag of $4.1 trillion. Massive spending generally comes hand in hand with the printing of more dollars by the Federal Reserve on an equally massive scale. This devalues the dollar and increases inflation.
Biden says he will raise taxes to pay for those plans and others, which theoretically means the Federal Reserve won’t have to go on a printing spree and we won’t have to worry about inflation. Not so fast, though. Unfortunately for the working men and women of America, Biden’s tax agenda is as inflationary as his spending agenda.
The Biden administration has proposed raising the corporate tax rate, raising payroll taxes, instituting a global minimum tax on overseas profits, significantly raising income tax on wealthy individuals and nearly doubling the capital gains tax.
Those tax hikes are certainly not going to help the situation. Wealthy individuals and entities will just find creative ways to hide their money or avoid paying taxes, as they have always done (see: Amazon). Moreover, corporations will absorb the cost of increased taxes by raising prices, and consumers, facing steeper payroll taxes, will have less to spend regardless of the effect Biden’s inflationary policies have on the value of the dollar overall.
But when it comes to the issue of inflation, it’s Biden’s proposed capital gains tax increase that should have everyone truly worried. Here’s why.
If a person has $10,000, they can do one of three things with it. They can spend it, save it, or invest it. Spending it is obviously good for the economy. Saving it is also good for the economy — the more money in banks, the more money banks are willing to lend out to stimulate economic growth. Investing is the riskiest choice, but from a long-term economic perspective, it is the most vital and the most important.
If you are a small business owner or an entrepreneur, investing capital back into your business and community will be a far riskier proposition under Biden’s tax plans —in many cases, the financial risk is far greater than the potential after-tax reward. If people know a certain amount of their profits from investing will be taken from them, they will simply stop investing.
That means fewer job openings, fewer new products or services and less innovation. It means a massive level of job deterioration in the small business community as higher tax rates make significant economic growth, reinvestment and new job creation practically impossible.
Capital investment is what actually creates new wealth — it is the fuel that fires the engines of the economy. Without capital investment, the economy simply doesn’t grow. The number of jobs stays stagnant (and will eventually decrease) and the only new “wealth” entering the economy is the increasingly worthless currency being printed like toilet paper by the government.
High income and corporate taxes are potentially inflationary. Massively increasing the welfare state is potentially inflationary. Doing these things while also imposing measures making capital growth effectively impossible absolutely guarantees inflation.
In this way, inflation and the policies that cause it must be understood as a tax on the working men and women of America. If the price of food or gas or clothes goes up a few dollars, it means little to the ultra-rich or the career politicians positioned comfortably on the taxpayer’s teat — the same career politicians who pass the policies that create inflation. But it can be devastating for those struggling to get by and can destroy the lives of those just barely doing so.
Inflation isn’t a natural disaster. It’s not something that just happens. It is the direct result of bad laws and bad policies. Inflation can be controlled, but only if the politicians and bureaucrats who cause it are held accountable.
Julio Gonzalez founded Engineered Tax Services.