We should reverse neoliberal inequality and save hundreds of billions of pounds by using taxes to control inflation, leaving monetary policy unchanged, but as our last resort and not our only option.
- Controlling inflation requires pain. Interest rates hurt debtors, leave renters largely unscathed, and reward the majority of UK homeowners, who own outright, with higher interest on their savings. This is inefficient, arbitrary and hugely regressive.
- Income tax increases require less pain, as changes are transmitted to consumers more quickly and inflict less collateral damage on business and government. The tax revenues would pay down government debt, extracting the money rather than rewarding the wealthy, so the overall cost is zero.
- Taxes can be decentralised, addressing monetary policy’s ‘one-size-fits-all’ interest rate that large, diverse economies find problematic. Given the goal of influencing consumer prices, taxes can target households in regions where inflation is highest rather than hitting the whole economy, everywhere. Taxing above average incomes would target those responsible for the vast majority of discretionary spending. And with monetary policy remaining as our backstop, the risk is zero.
A ‘tax ventilator’ from zero to three percent on household incomes should easily quell future inflation, saving debtors hundreds of billions of pounds and paying down government debt. The goal of low, stable interest rates, unchanged over the cycle, would boost investment and growth. At present, businesses and governments often cut investment when confronted with higher interest payments, reducing future capacity and fueling future inflation.
The savings would be less than the extra £1,000,000,000,000 paid by UK debtors since interest rates started rising in November 2021, but less pain is its own reward. That ballpark trillion averages at 8% of GDP per year. After the banks and the government have taken their cut, 80% of it goes to the top 10% of savers. If spent, it exacerbates inflation; if saved, it will add to the hundred billion pounds that are inherited each year, fueling further inflation that our beleaguered debtors must overcome on behalf of us all. We should not regulate consumer prices on the backs of debtors when we can target consumption in general.
This is Keynesian demand management but without the commitment to full employment, which proved hugely inflationary. The tax ventilator need not be the Treasury’s responsibility, but could reside with a Congress committee, increasing democratic accountability, or the Federal Reserve; or conceivably an algorithm.