Taxing corporations in any amount cannot and will not have any bearing on inflation.
Tax and pretend.
W hite House press secretary Karine Jean-Pierre betrayed either remarkable acting talents or a dismaying lack of awareness of both basic economics and fundamental tax policy during her press conference of May 17. There she was asked how the administration could fight inflation by raising taxes on the wealthiest corporations, a claim we may well hear more about in the wake of last week’s troubling inflation numbers.
For her answer, Jean-Pierre merely stumbled through about a minute’s worth of the administration’s talking points centered on the idea that making the rich pay “their fair share” will somehow make a more equal America, “one that doesn’t leave anyone behind.” It was crystal clear that she was literally reading right out of the administration’s “tax the rich” playbook.
For starters, she repeated the unprovable claim that “workers, cops, builders” pay taxes at a higher rate “than the most fortunate people in our nation.” (I thoroughly debunked this nonsense in my recent article fact-checking President Biden’s remarks on tax policy from his State of the Union address.)
That aside, she failed to make any case for the claim that raising taxes will put downward pressure on inflation. The reason is that, as Milton Friedman said, inflation is a monetary phenomenon. That means inflation can’t be caused or eliminated by tax policy. Instead, it’s caused or eliminated by monetary policy, enacted by the Federal Reserve.
That is to say, inflation is not caused by an unfair tax system, corporations or rich people not paying their taxes, or the lack of environmental justice. It’s caused by increasing the money supply where there is no relative increase in productivity. In that case, you end up with more dollars chasing the same (or fewer) goods and services. The result? Rising prices.
Flooding the market with more currency simply reduces the value of that currency as measured against the products and services for sale. As a result of the reduced value of the currency, merchants demand more for their goods and services. And the Fed’s monetary policy during the pandemic had the effect of flooding the market with more dollars in a shorter span of time than ever before in American history.
At the same time, the government strangled producers and service providers with its Covid shutdown orders. Tens of millions of people were paid to stay home. Some made more money sitting on the couch than they would have by going to work. That is the perfect formula for rising prices: flood the market with trillions of additional dollars while restricting production of most of the country’s economic output.
What about taxing corporations to reduce inflation? Taxing corporations in any amount cannot and will not have any bearing on inflation, because, as stated, monetary policy alone is responsible for inflation.
Aside from that fact, taxing corporations is bad tax policy. While few people will admit that, it’s nevertheless true. The reason is corporations don’t pay taxes; people do. Corporations are not faceless creatures that operate autonomously as if by some secret and hidden economic force. Corporations are made up of people, falling into one of three categories.
Corporations have: (1) owners (investors), (2) employees, and (3) customers who purchase the goods or services offered by the corporation. When you tax a corporation, people pay the tax in one of three ways: (1) owners pay in the form of reduced profits (i.e., smaller return on investment), (2) employees pay in the form of reduced wages or benefits, or even fewer employees (i.e., layoffs), and (3) customers pay in the form of higher prices (or the same price for lower quality or quantity of goods or services).
Generally, payment is made by a combination of all three elements. In no case does the corporation really pay the tax. This is why sound tax policy dictates that there be no taxes assessed against corporations at all — none. Indeed, I would eliminate all five of the major federal taxes: the personal and corporate income tax, the Social Security tax, the estate/gift tax, and the employment tax. These taxes collect about 98 percent of federal revenue. I would replace all of them with one simple, comprehensive national retail sales tax (not a VAT) assessed at the point of purchase of all consumption goods and services.
In the end, whether corporate taxes are high, nonexistent, or somewhere in between, the only way to stop today’s surge in prices is to stop pumping money into the economy.