INFLATION SPIRAL ESSENTIALLY A TAX

January 19, 2022
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Inflation is a sneaky devil, never really presenting itself until it’s gotten so out of hand its tendrils have wrapped around like kudzu and overtaken America’s economy.

Last week, the Labor Department announced that inflation in America had risen to 7% in 2021 – the biggest increase since 1982 – almost 40 years ago.

Liberals here in North Carolina have made light of the tax cuts orchestrated by the conservatives in the Legislature, saying the cuts don’t save enough money to matter to individuals and families.  As the realities of inflation become more real every day, we’re seeing more and more clearly the nasty kick in the teeth inflation is giving middle-class folks.

And it’s becoming more evident, this is the wrong time for our liberal friends to criticize tax cuts.

We say that because it’s becoming more apparent that the dramatic rise of inflation appears to be acting as a tax increase for lower and middle income families.

Robert Frick, corporate economist at the Navy Federal Credit Union, says the inflation increase may be at its peak but may not go away quickly “until fundamental factors such as supply-chain disruptions and the chip shortage get fixed.”

Frick continued, “This is sapping consumers’ buying power, as real hourly wages have now dropped for nine straight months. And lower income Americans are hurt most, given high prices in food and energy take up a bigger portion of their paychecks.”

One of the ways inflation hurts most is that while wages have been rising during this period at the fastest pace in decades, particularly for lower-paid workers, prices for essential items have eaten into any real gains workers may have made in their pay.

Then there’s the other side of the inflation story that has come to light.

A Wall Street Journal article entitled “Washington Cashes In On Inflation” talks about why the federal government seems to show such little concern for the inflation that is hurting middle and lower income Americans.  The article refers to last week’s Congressional Budget Office December budget review that revealed federal receipts increased by a smoking 31% in the fiscal First Quarter.  Adding $238 billion to federal coffers!

Where did that revenue come from?  The Journal reported that “Individual income taxes revenue soared by 55% in the quarter, or $189 billion, to $536 billion. Corporate income taxes rose 44%, or $30 billion, to $99 billion. Payroll taxes and a variety of other receipts, including a 16% increase ($4 billion) in remittances from the Federal Reserve, made up the rest.”

This is what’s tricky about inflation.  As the Gross Domestic Product (GDP) – a measurement we use for economic growth – goes up, so do business profits, wages and salaries.  From those increases, the federal government reaps a benefit – a “revenue windfall” as the WSJ describes it – in the form of taxes.

And the Washington politicians get the windfall “even if average wages for workers falls behind inflation, as they did last year by 2.4%, according to the Bureau of Labor Statistics.”

if you cut through all the political smokescreen and subterfuge from the liberal politicians in Washington about how they need to throw even more of our tax money – trillions of dollars – at so-called COVID pandemic-related economic problems, the truth is, as the Journal says, “Washington doesn’t need a tax increase.”

The Journal goes on to say… “As the economy grows, the revenue will keep flowing, even if the pace of increase slows.  Even amid Covid’s Omicron variant surge, the economy is growing smartly and doesn’t need new spending.  Everyone who wants a job can get one – or two.  The economic problem is inflation, which is hurting workers even as it rewards politicians.”

Another, even more straightforward, take on inflation comes from Kentucky Senator Rand Paul who serves on the Senate Committee on Small Business and Entrepreneurship.  Senator Paul has released an 18-page report on inflation that blames the 7% inflation hike on excessive coronavirus relief spending by Congress.

According to Paul, “In recent months, prices on nearly everything from gas, food, and clothes to electricity, car prices, and rent, have all increased, and unfortunately it’s only going to get worse.  Congress needs to realize that further spending at this time of rapidly rising prices is only going to continue the trend of rising prices on this nation’s already vulnerable businesses and families.”

Senator Paul’s report utilizes public price index studies and public opinion studies to show how lower income families and individuals are impacted most by inflation’s rising costs.  Addressing inflation’s impact on business, Paul writes that “larger businesses have been able to adapt to the changing conditions, it is small businesses with thin margins that are hard-hit….Sustained inflation is more likely a fatal blow to small businesses squeaking by than larger corporations entrenched in their economies of scale.”

Senator Paul’s main point?  He blames Congress’s passing of massive spending to “fix” the economic ills of the pandemic.  It’s a lesson in how government overplaying its hand – in this case, artificially pumping money into the situation can overheat the economy and cause problems..  He writes:

“$4.9 trillion in COVID-19 stimulus spending has led to one of the highest and sustained levels of inflation in U.S. history.  Though government stimulus spending was intended as a form of relief, and low and middle-income families as well as small business owners were promised that their taxes would not increase as a result of these packages, Americans are now paying a ‘hidden tax’ for these policies.”

The actions taken by Congress to pour taxpayer money into the economy to try to address the pandemic was not a partisan thing.  Both parties were involved.  And it probably seemed right at the time.

But a few trillion dollars later – we have a bigger debt than ever.  And the scary thing for those of us who remember the inflation of the 1970s, we have opened the proverbial Pandora’s Box of inflation that had been in check for decades that may be hard to put back in that box.

Let’s close with this little bit of history to add some context.

In 1980, one of the key planks of Ronald Reagan’s campaign for President was to fight inflation which at that time was at 12.5%.  By 1982, under President Reagan’s leadership and conservative approach to economic issues, the inflation rate was down to 3.8 %– a remarkable achievement.  Reagan said of inflation: “Inflation is as violent as a mugger, as frightening as an armed robber, and as deadly as a hitman.”

Which leads to this quote that describes our current fear:  “Inflation is like toothpaste.  Once it’s out, you can hardly get it back in again.” Karl Otto Pohl, German economist and Chairman of the German Central Bank Council from 1980 to 1991.


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