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Comment by landemva | Hacker News Reader

> In America, tax cuts lead to inflation

I would find this surprising. Do you have charts for this, and which historical timeframes?

Doesn't it make pretty intuitive sense? If the government cuts taxes while keeping spending the same it causes an increase in the overall supply of money. A basic market principle is that increasing supply in the face of stable demand leads to a decrease in price. A decrease in the price of money is inflation.

Not really. My intuition would be less tax just means different kinds of things purchased, not really a change in the total amount available in the pool... I'm not well learned about this stuff, but I don't see it being intuitive at all

I.e. tax money I would think eventually circulates back into the same pool, same pool non-gov entities trade in.

My intuition tells me the total pool size available at any given moment shouldn't be drastically different and wouldn't be correlated to tax amounts in an obvious way.

I guess another way of thinking about it is that cutting taxes (in theory) leads to increased consumer spending which equates to a increase in demand. In supply constrained environments like what we see today increases in demand will result in increases in price. Widespread increases in price is inflation. Idk it seems pretty intuitive to me and is a pretty common theory, for instance its mentioned here https://www.forbes.com/sites/howardgleckman/2022/06/02/shoul...

I suppose where my assumption could be wrong is that consumer vs gov spending sort of cancel each other out, i.e. fluxuations in the two are quickly negated because they take place in the same overall "market" and eventually anyway end ups in non-gov hands because there's a lot more of us in the market

Not sure if I'm explaining myself well

You've got to look at the combination: (1) Cut taxes, (2) Cut spending too? Or not, (3) If not, is the increased deficit financed by selling bonds to the public, or to the central bank?

An increase in the money supply comes about only if (1) taxes are cut, (2) spending isn't cut, (3) the central bank buys the bonds issued as a result, creating the money to do so out of nothing.

A deficit financed by selling bonds to the public might perhaps increase expectations that sometime in the future the central bank will buy bonds using newly created money, but that is likely to have a more muted effect than them actually creating money now.

The central bank buys the bonds off commercial banks so you need the commercial banks to create the deposits that the government can actually spend. If the goverment was sitting on central bank money it would have to issue physical dollar notes to actually spend the money.

I'm not familiar with all the technical details, which in any case differ from country to country. But if you're trying to claim that the central banks of countries with fiat currencies can't create money to finance government deficits, you're just wrong. They very much can, and when they do to excess, the result is hyperinflation, as seen in places like Wiemar Germany and Zimbabwe. In moderation, it is a crucial part of central bank monetary policy, being the main mechanism by which central banks can expand the supply of base money, which is typically desired in a growing economy in order to prevent deflation.

The process is known in economics as "monetizing debt". That this is a thing that central banks can do, and do do, is not in the least bit controversial.

> Doesn't it make pretty intuitive sense?

It may seem intuitive, but it does not match what happens in the #1 economy which issues the reserve currency of the world.

> A decrease in the price of money is inflation.

Federal Reserve sets price of money by manipulating interest rates. Federal Reserve is increasing interest rates and consumer prices and producer prices are increasing. This may contradict your belief about what causes increased prices.

It does to me.

During World War II, the Canadian government raised taxes in a bid to reduce demand and curb inflation (along with wage and price controls, mandatory savings, and other measures).

Inversely, reducing taxes holds the potential to leave money in people's pockets, increase demand, and trigger inflation. Whether it does so will depend on a host of other factors, of course.

Tax raises obviously increase the deadweight loss associated with that tax because at some point the cost exceeds the marginal utility of the product and people buy less until things are in balance again. But when there isn't enough product to go buy and the government pays off debt, then the deadweight loss may actually be reduced over the long term.

Nope. Tax cuts as shown throughout history increase growth and inflation tends to be low during high growth since there is an rise in production and productivity.

How much growth did we see from the Tax Cuts and Jobs Act? Doesn't seem like much if any https://www.brookings.edu/research/searching-for-supply-side...

Tax cuts are an effective way to bolster a weak economy and create jobs—as long as they are targeted at the bottom 90% of income earners. - findings from NBER - https://www.nber.org/papers/w21035

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