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Comment by bryanlarsen | Hacker News Reader

The IRA increased taxes. Taxes are the most effective means of fighting inflation.[1]

Long term, the IRA will reduce energy prices. Energy is a huge component of inflation.

1: https://www.slowboring.com/p/tax-increases-are-the-best-cure...

This is gaslighting -- increased taxes without increasing spending might reduce inflation. But the IRA massively increased government spending, and government spending is a primary driver of inflation. [1]

1: https://www.federalreserve.gov/econres/notes/feds-notes/fisc...

The IRA increased taxes by 740B and increased spending by 440B. That's a net reduction.

If you transfer wealth from the rich (who mostly use money to invest in assets) and transfer it to the poor (who mostly use money to buy consumer goods), wouldn't that naturally reduce asset values while increasing prices of consumer goods?

Perhaps, but the IRA doesn't do that, unless the poor are suddenly buying electric cars and wind turbines.

Also remember the time impact. Taxes went up immediately, whereas the bulk of the IRA rebates will happen in a few years.

For the rest of the class, this is an economic fringe theory taken by economists about as seriously as astronomers take flat earthers

> this is an economic fringe theory

Fiscal policy's monetary effects are not a fringe theory. Increasing taxes reduces the money supply, and a smaller money supply decreases price levels ceteris paribus. This is conventional economics.

Modern monetary theory goes a step further, arguing deficits and debts don't matter, all that matters is inflation. Which is sort of true, in a way, but also useless since it provides us with no system for predicting when inflation might become problematic beyond deficits and debts.

> Increasing taxes reduces the money supply

I don't doubt it, but I'm curious about how it works:

If I buy a car from GM, who then uses the money to buy things from suppliers, who use the money to pay some people and build a new factory, etc. - that all increases the velocity of money which increases inflation.

If I pay the same amount to the government, who then uses the money to buy things from suppliers ... how does that have a different inflationary effect?

I'd guess that the government, with less revenue than expenses, doesn't save the tax revenue. It's not stuffed in a giant mattress at the Treasury. I would guess that it's spent, pretty soon. In fact, there might be more velocity if I give the money to the government than to a company sitting on fat cash reserves.

EDIT: I just realized: Higher taxes reduce return on investment and thus reduce investment. Is that the only mechanism in play?

> pay the same amount to the government, who then uses the money to buy things from suppliers

The first part is tax. The second spend. There is no obligation for the government to tax everything it spends, or spend everything it taxes.

In practice, governments will spend what they tax which is why we need an independent central bank.

> The first part is tax. The second spend.

True, but I don't see how that impacts inflation. They do spend it, as you say, which returns us to my original question.

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