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To begin with, there was the endlessly repeated claim that the tax agency had been crippled[hurt] by “persistent budget cuts” and that a massive influx of new funds was needed just to make up for lost ground. Not true. As economist Dan Mitchell has pointed out, advocates over the past decade were able to argue that the IRS was starved by comparing its budget specifically with what it received in 2011, just after there had been a funding spike. But review the long-term data and it is clear that the IRS budget, adjusted for inflation, had roughly doubled since the 1980s. In 2021, the agency’s budget was $13.7 billion.

A related whopper was the one about all the money the IRS was unable to collect because it was too understaffed and technologically backward to keep up with sophisticated tax cheats. Much was made of the so-called “tax gap” — the difference, according to the Treasury Department, between the taxes owed and those actually paid. According to Charles Rettig, the Internal Revenue Service commissioner, the federal government is being “outgunned” to the tune of $1 trillion a year.

(Katherine, Arrington: Defending the Wealth Tax The Dartmouth: Dartmouth College University Wire 3-8)

Another common issue with wealth taxes is enforcement. Nonmonetary assets such as businesses, art and property can be hard to value, thus creating issues in quantifying the exact tax owed. Warren's plan, however, has already addressed this issue, utilizing the precedent set by estate taxes. After death, all of a person's wealth is valued and then taxed. Warren proposes that the same established process be replicated for the wealth tax.

If revealed preference is anything to go by, most countries are extremely hesitant to introduce wealth taxes. But if ever there were a time that wealth taxes could help, it may be now.

(Tom, PeaceStudies@King’sCollege, The strong case for a wealth tax Waterloo Region Record (Ontario) lexis)

For 100 years, the primary method for dealing with inequality has been the income tax. Unfortunately, this tool is becoming increasingly inadequate for dealing with the new phenomenon of super-rich billionaires. The richest person in Canada, David Thompson, is estimated to possess family wealth of $77 billion. Imagine for a moment that society were to try to tackle this by implementing a 100 per cent income tax on his annual income, on top of which Thomson spends, say, $100 million a year on various mansions, banquets, yachts and other frivolities of the superrich. It would still take 770 years to reduce his total wealth to levels of normal people. To meaningfully reduce inequality the income tax simply won't cut it. We require a wealth tax. Wealth taxes are not new. They have existed in a dozen countries in Europe over the last several decades, working decently in some cases and terribly in others. In practice, wealth taxes typically face three reoccurring obstacles: One is accurately valuing the assets of the rich, since certain assets like artwork or private businesses might not have an obvious price. A second is exemptions. These are deadly to the wealth tax because they lead to widespread gaming of the system. For instance, in Sweden, exemptions on business equity made it easy for rich individuals to simply shift their wealth into ownership of firms and thereby avoid the wealth tax. The third problem is tax avoidance. Estimates of this vary widely but the most pessimistic estimate is that it can be a big problem indeed: a one per cent increase in the wealth tax lowers the amount of wealth that rich individuals declare by roughly 40 per cent after five years. Luckily the last few years have seen an explosion of studies examining what makes wealth taxes succeed or fail in the real world. We now know that the valuation problem is actually smaller than it first appears, since at least 80 per cent of the wealth of the top 0.1 per cent wealthiest families is in the form of assets that are regularly traded. These include publicly traded stock, bonds and real estate, and so have a clear market price. Does anyone really believe that Elon Musk can hide the bulk of his wealth when everyone can readily see the value of Tesla shares? For private businesses, simple effective formulas can be used to approximate their value. For instance, Switzerland uses rules based on the book value of business assets plus multiples of the firms' profits. Mistakes will happen, of course, but tax authorities can correct them by using retroactive adjustments when assets are finally sold. Taxpayers can then be refunded or debited if it turns out their assets were worth slightly less or more than originally estimated. Avoidance can also be substantially mitigated by having a centralized tax system for the whole country, since in Switzerland and Spain the rich often avoid wealth taxes by simply moving to a different city. It's also necessary to make extensive use of third-party reporting whereby one's financial information is passed directly to the tax authorities by intermediaries such as employers or banks. After all, it's not as if the wealth of the rich is truly unknown. The wealthy know exactly how much their investments are worth since it's meticulously recorded in their banking documents. All that's needed is legislation requiring such information to be automatically shared from the banks and money managers to the tax authorities, as is already common practice with many people today for their regular income. According to state-of-the-art research, instituting a centralized tax system and third-party reporting would likely reduce total avoidance in Switzerland from a disastrous 43 per cent to a sustainable 6.9 per cent. All in all, the evidence is clear: an effective wealth tax is completely feasible as long as it is designed cautiously and carefully. Just as the income tax was a fundamental requirement for building the welfare state in the 20th century, the wealth tax is a fundamental requirement for building a decent society in the 21st.

Myth #2: A higher top income tax rate is an effective substitute for a wealth tax

Higher top marginal tax rates on the highest labor incomes alone would not affect a great deal of wealth or the gains that wealth generates. To begin with, a very large share of the reported income of the wealthy—namely, capital gains and dividends—is taxed at much lower rates, meaning that the tax code would be more progressive at the top if there were no preference for this type of income. Moreover, because the tax code does not tax gains until assets are sold, a large amount of wealth is not included annually as part of taxable income and may never be subject to income tax at all if held until the owner dies. The tax code would still be tilted heavily in favor of the uber-wealthy if the only change were a higher top tax rate on ordinary income, especially if the tax rate on dividends and realized capital gains remained low.

( Tom, SocialJustice&PeaceStudies@Western,https://inequality.org/research/why-we-should-abolish-the-super-rich/)

In many parts of the world, inequality is spiraling out of control. The basic facts have become depressingly familiar. In the United States, the top 0.1 percent now control about the same amount of wealth as the bottom 90 percent of the entire population. Globally, the richest eight individuals possess as much wealth as half the entire planet. The United States could completely eradicate homelessness by taxing away just 2 percent of the wealth of a mere two billionaires, Jeff Bezos and Bill Gates. If we redistributed 2 percent of the wealth of all the world’s billionaires, leaving completely untouched the wealth of well over 99.9 percent of the world’s population, we could eliminate extreme poverty entirely. Billionaires, meanwhile, would likely not even lose any money in the process since they typically earn more than 2 percent annually off their wealth. Despite stats like these, the same old objections resurface again and again, like ideological zombies, whenever anyone dares suggest a redistribution of grand fortunes. The first of these objections: Reducing inequality remains simply impossible because the rich will always be able to avoid paying any new taxes levied upon them. The second: Even if we could raise taxes on the rich, we shouldn’t — because the costs to society always outweigh any benefits. And the third objection: The rich, morally speaking, deserve their good fortune. I’ve been hearing these arguments my whole life. Does any evidence stand behind them? To find out, I spent over five years sifting through mountains of research, determined to keep an open mind and a non-dogmatic attitude. The result: a just-published book, Against Inequality: The Practical and Ethical Case for Abolishing the Superrich. What did I find? First, the rich regularly do maneuver to avoid paying their taxes. But any government serious about making them pay their fair tax share can effectively tax them. Governments have a wide array of viable measures they can readily implement. Governments can, for instance, close loopholes and hire more auditors. They can require banks to immediately report major income spurts to tax authorities. Governments can also increase the severity of the penalties for tax evasion. Rich people currently face little more than a slap on the wrist when they shortchange Uncle Sam. Poor people, by contrast, go to jail for stealing far less money. If we reversed that reality and had the rich actually face the prospect of real jail time, you can bet we would almost certainly see far less tax evasion in America’s corporate boardrooms. And all those accountants and lawyers who actually do the tax avoiding for their rich clients? We could begin a serious effort to also hold them criminally liable for helping rich people use tax havens to avoid paying their fair tax share. All of this could be possible. Many countries, the historical record shows, have successfully implemented stiff tax rates, with the United States one of them. During World War II, the U.S. federal tax rate on income in the top tax bracket hit an astonishing 94 percent. Top tax rates in nations like the UK, Sweden, and Denmark surpassed 90 percent into the 1970s. Overall, the top U.S. tax rate averaged 81 percent for nearly half a century, from 1932 through 1980. What about the claim that the costs of taxing the rich outweigh any benefits? The evidence shows the exact opposite: The benefits from high taxes on the rich — and low levels of inequality — run far greater than the costs, a different order of magnitude altogether. High taxes do, to be sure, come with some costs. But these seldom amount to much. Take, for instance, the argument that rich people will respond to high taxes by working less. Precious little evidence supports this contention. Does anyone really believe that, say, Lebron James would quit playing basketball if he faced a higher tax rate? Many high-earners do not work simply for the money. They find motivation in status, power, and prestige — and even sometimes in a love of what they do. The most serious argument against high taxes on the rich may well be that they reduce private investment. But seriously taxing the rich doesn’t necessarily reduce investment. In many cases, high tax rates simply re-arrange investment. If the state collects taxes and then spends that money in productive ways, the economy will grow. Indeed, the state-of-the-art evidence shows that high inequality, all things considered, actually tends to reduce an economy’s overall growth rate. So much for the costs of significantly taxing the richest among us. What about the benefits? Five stand out. Our environment. The richest 20 individuals emit 8,000-times more carbon than our Earth’s poorest billion people combined. Redistributing a portion of top wealth to invest in things like public transit would directly reduce emissions and help build a desperately needed low-carbon infrastructure. Our democracy. Inequality erodes democracy. In the United States, as the political scientists Martin Gilens and Benjamin Page have noted, the majority “does not rule – at least not in the causal sense of actually determining policy outcomes.” Democracy has disintegrated into oligarchy. Opportunity for all. Inequality makes a mockery of the equal opportunity we claim to value. The poorest residents of Chicago today face a life expectancy fully thirty years shorter than the richest. High redistributive taxes could reverse this most brutal of disparities. Reduced xenophobia and racism. Right-wing populism typically grows hand-in-hand with economic insecurity. We can reduce that insecurity by taxing the rich to fund free public services, a stronger safety net, and perhaps even a guaranteed basic income. Reduced social friction. Reducing inequality, the evidence also shows, builds community health and cohesion. Reducing inequality encourages greater levels of trust and tolerance, better mental health, and less crime. That said, I did find one area where my initial suspicions didn’t hold up. The jury remains out whether inequality clearly shortens life expectancy.

(Katherine, Arrington: Defending the Wealth Tax The Dartmouth: Dartmouth College University Wire 3-8)

Yet another claim is that if the United States were to adopt a wealth tax, it would cause the rich to simply move to another country to escape taxation. This occurred when France adopted a wealth tax. However, the U.S. is in a different position than its European counterpart. For one, France is part of the European Union, which makes it very easy to move abroad; the United States has no such allowance. Secondly, Warren has foreseen this potential issue and has planned for it. Her proposed "exit tax" claims 40% of an individual's wealth above the $50 million threshold if they renounce their American citizenship. A version of this exit tax already exists; Warren simply proposes raising it.

Every time I hear that we as a nation cannot afford something — whether that might be assuring non-toxic water in Jackson and Flint or universal pre-K or an industrial policy with teeth — I have wondered how many dollars a national wealth tax might yield. So I looked the numbers up.

Wealth turns out to run way bigger than income. Our total U.S. wealth in 2021 sat at . Total income, combining  and , amounted to about $25 trillion. A small wealth tax would clearly produce much more government revenue than a much larger income tax.

The Ultra-Millionaire Tax Act would level the playing field and narrow the racial wealth gap by asking the wealthiest 100,000 households in America, or the top 0.05%, to pay their fair share. The Ultra-Millionaire Tax would bring in at least $3 trillion in revenue over 10 years - without raising taxes on the 99.95% of American households that have net worth below $50 million - according to a from the University of California-Berkeley. The bill would create a fairer economy through: A 2% annual tax on the net worth of households and trusts between $50 million and $1 billion A 1% annual surtax (3% tax overall) on the net worth of households and trusts above $1 billion The Ultra-Millionaire Tax Act is cosponsored by Senators Bernie Sanders (I-Vt.), Sheldon Whitehouse (D-R.I.), Jeff Merkley (D-Ore.), Kirsten Gillibrand (D-N.Y.), Brian Schatz (D-Hawaii), Edward J. Markey (D-Mass.), Mazie Hirono (D-Hawaii.). "The ultra-rich and powerful have rigged the rules in their favor so much that the top 0.1% pay a lower effective tax rate than the bottom 99%, and billionaire wealth is 40% higher than before the COVID crisis began. A wealth tax is popular among voters on both sides for good reason: because they understand the system is rigged to benefit the wealthy and large corporations," said Senator Warren. "As Congress develops additional plans to help our economy, the wealth tax should be at the top of the list to help pay for these plans because of the huge amounts of revenue it would generate. This is money that should be invested in child care and early education, K-12, infrastructure, all of which are priorities of President Biden and Democrats in Congress. I'm confident lawmakers will catch up to the overwhelming majority of Americans who are demanding more fairness, more change, and who believe it's time for a wealth tax."

If a firm is credit constrained – e.g., due to asymmetric information – the owner’s allocation of own economic resources into the firm becomes important for the firm’s development. A possible impact of a wealth tax then comes from two different sources. The first is that the wealth tax affects the taxpayer’s overall wealth accumulation. This effect is normally considered negative, both due to the tax payment itself and due to a negative substitution effect arising from the reduced returns on savings. However, there is also a positive income effect, arising from the need to save more today in order to pay for future taxes. If the income effect is sufficiently large and the substitution effect sufficiently small, a positive impact on overall after-tax wealth accumulation is possible, and, according to Ring (2020b), even empirically relevant. The second source of wealth tax influence comes through a portfolio composition effect: A higher wealth tax gives the taxpayer stronger incentives to place economic wealth into assets with lower tax-value relative to market-value. An unlisted firm serves this purpose, particularly if the added capital is used to expand employment.

The idea of imposing a tax on individual wealth has appeared in policy debates with increasing frequency. Proponents of a wealth tax have primarily argued that such a tax would achieve three objectives. First, a wealth tax would mitigate rising wealth inequality. Second, the tax would raise significant revenue that could be used to address debt and deficit concerns, and fund a variety of social policies. Finally, the tax would capture some income sources that currently are not taxed (e.g., unrealized capital gains or types of imputed income). This In Focus presents an economic perspective on wealth taxes. Because no federal wealth tax currently exists, the discussion in this In Focus is primarily in terms of a general wealth tax. Designing such a tax would require careful consideration about a number of specific issues. Where appropriate, the discussion highlights specific points of consideration.

It states: “Our results show that…major tax cuts for the rich increase the top 1% share of pre-tax national income in the years following the reform. The magnitude of the effect is sizeable; on average, each major reform leads to a rise in top 1% share of pre-tax national income of 0.8 percentage points. The results also show that economic performance, as measured by real GDP per capita and the unemployment rate, is not significantly affected by major tax cuts for the rich. The estimated effects for these variables are statistically indistinguishable from zero.” It continues: “Our findings on the effects of growth and unemployment provide evidence against supply side theories that suggest lower taxes on the rich will induce labour supply responses from high-income individuals (more hours of work, more effort etc.) that boost economic activity. They are, in fact, more in line with recent empirical research showing that income tax holidays and windfall gains do not lead individuals to significantly alter the amount they work.” The authors conclude: “Our results have important implications for current debates around the economic consequences of taxing the rich, as they provide causal evidence that supports the growing pool of evidence from correlational studies that cutting taxes on the rich increases top income shares, but has little effect on economic performance.” Dr Hope, Visiting Fellow at LSE’s International Inequalities Institute and Lecturer in Political Economy at King’s College London, said: “Our research shows that the economic case for keeping taxes on the rich low is weak. Major tax cuts for the rich since the 1980s have increased income inequality, with all the problems that brings, without any offsetting gains in economic performance.” Dr Limberg, Lecturer in Public Policy at King’s College London, said: “Our results might be welcome news for governments as they seek to repair the public finances after the COVID-19 crisis, as they imply that they should not be unduly concerned about the economic consequences of higher taxes on the rich.”

One of the most effective ways to rectify these economic distortions and inject fairness into the US tax code: a wealth tax. The US federal tax code is primarily aimed at income—money coming in on a recurring basis, including payments from labor, like wages. It takes little notice of a person’s wealth—the value of their assets (real estate, savings, investments, etc.), minus debts. The US federal tax code is “progressive” in that it levies a higher tax rate on those who can most afford it. However, decades of uneven cuts to the income, corporate, and estate taxes, and increases in payroll taxes, have dramatically for the wealthiest at the same time that income and wealth inequality have soared. Since 1979, incomes for the top 0.1 percent increased by , nearly 15 times as much as they increased for the bottom 90 percent of earners over the same period. These enormous, and growing, incomes accumulate year after year, creating huge fortunes for the very rich: Today, the top 0.1 percent hold nearly as the bottom 90 percent. Taxing income at higher rates and with fewer loopholes is important, but it doesn’t touch the wealth the very top has already amassed, and it doesn’t fairly measure a person’s or family’s true economic status or ability to pay their fair share. Consider two people: a teacher with little savings in the bank and a tech tycoon with $200 billion in business equity, real estate, and fine art. If both the teacher and the tycoon take home $62,000 in labor income (the national for teachers, and not far off from Jeff Bezos’ ), they pay the same federal income tax. That isn’t fair, and merely increasing the income tax rate wouldn’t correct this imbalance. A wealth tax is fair. Under the income tax system, Americans with low-wage jobs may pay a lower nominal income tax rate than the wealthy but pay a much higher percentage of their wealth in taxes. A wealth tax can effectively wealth concentration at the very top for the simple reason that, if the wealthy have to pay a percentage of that wealth in taxes each year, it becomes harder for them to amass even more wealth. While a wealth tax should not be seen as a replacement for other income and capital tax reforms, we cannot sufficiently address the concentration of wealth in the economy without a tax instrument specifically aimed at that wealth. A wealth tax is just. Wealth in the US is—and —heavily by race. Since the country’s founding, our laws and customs have ensured that white people accumulate wealth at the expense of Black and brown people. For hundreds of years, meant that Black people, violently forced into servitude, went uncompensated for labor often performed in direct service of white-owned enterprises. Even after slavery was abolished, overtly discriminatory policies, including , continued to Black and brown Americans from receiving fair wages and accruing assets. When Black communities did achieve economic prosperity in spite of these policies, white mobs and white power structures it. The legacies of slavery and racism are still with us today, in policies and in economic outcomes. In 2019, median income for Black households was roughly that of white households; for Latinx households, median income was approximately 74 percent that of white households. The typical white family, meanwhile, held eight times as of 2019 than the typical Black family, and five times more wealth than the typical Latinx family. Both of these gaps continue to as the pandemic rages. Importantly, these racial wealth disparities are self-perpetuating. One wealthy generation bequeaths their wealth to future generations through inheritances and direct gifts or transfers, like payments toward college tuition or housing. Nearly 30 percent of white families receive , compared to just 10 percent of Black and 7 percent of Latinx families, and the average value of received inheritances is three times for white families. A wealth tax would interrupt this cycle of inherited wealth by taxing it as it accrues. A wealth tax is targeted and effective. A wealth tax is one of the most direct and powerful tools to raise revenue exclusively from the wealthy. By setting an exemption threshold on net worth, policymakers can ensure that households below that threshold simply do not pay the tax. To return to our previous example: Both the teacher with little savings and the tycoon with a stockpile of luxury assets theoretically pay the same federal income tax on their yearly earnings. Under a wealth tax, the tycoon would pay an additional sum on their billions. The teacher would not. For too long, the US tax code—focused on income—has allowed the wealthy to hide and hoard their wealth. As a result, wealth inequality has skyrocketed and become a harmful feature of the US economy. A wealth tax could both rectify this imbalance and repair the damage it has caused to workers and families.

consumer confidence, an economic indicator that measures the degree of optimism that consumers have regarding the overall state of a country’s economy and their own financial situations. It is a vital source of economic information, as private consumption constitutes about two-thirds of all economic activity in most countries. During an economic expansion, consumer confidence is usually high. Consumers accordingly tend to spend more than they do at other times, especially for bigger-ticket items and durable goods (e.g., automobiles and household appliances). The increase in consumer spending in turn helps the economy sustain its expansion. If for some reason consumer confidence declines, consumers become less certain about their financial prospects, and they begin to spend less money; this in turn affects businesses as they begin to experience a decrease in sales. If consumer spending continues to decline and businesses begin to cut back on production, the economy experiences a slowdown and may eventually enter a .

Incorporating such heterogeneity shows capital income taxes and wealth taxes have quite different implications for efficiency. Adapting an example from the paper, consider two individuals, Alan and Betty, who each have $1,000 in wealth. Alan keeps his wealth as cash tucked away under his mattress, while Betty actively invests her wealth in productive investments. Many models assume that Alan and Betty get the same returns on their wealth. The authors, however, point out that if Alan earns a return of zero percent and Betty earns a return of 20 percent, a capital income tax falls entirely on Betty because she has a positive capital income of $200. Alan has a capital income of $0 and thus no capital income tax liability. Under a wealth tax, Alan and Betty—or any pair of individuals owning the same amount of wealth—pay equal taxes, regardless of how much income their wealth generates. Switching to a wealth tax rewards productive investments and broadens the tax base from just Betty’s capital income to both individuals’ wealth. This leads to a better allocation of capital and higher output than under capital income taxation. The authors find that the optimal wealth tax rate in their model economy is about 3 percent. The revenues from wealth taxes allow the government to reduce the tax on labor income—from 22.5 percent to 14.5 percent. Adding an exemption level to the optimal wealth tax changes the results only marginally: The optimal level below which one would be exempt from the wealth tax is fairly low—about a quarter of average labor income. And the tax rates on both wealth and labor income rise only slightly. In contrast, the optimal capital income tax rate is negative and large, about 35 percent, meaning that the tax system subsidizes capital income. In the authors’ model, an optimal wealth-tax economy delivers greater and more broad-based economic well-being than the optimal capital income-tax economy due to a large rise in the level of consumption driven by lower labor income taxes and a decline in consumption inequality. The distribution of consumption is more equal under a wealth tax because the rise in consumption is proportionally larger for lower-income people since wage income accounts for a higher share of their total disposable resources. In contrast, a capital income tax requires higher taxes on labor income—since it acts as a subsidy to capital income—thereby resulting in only a small rise in after-tax wages. In sum, the authors conclude that a wealth tax is preferable to a capital income tax because it has the potential to boost growth while also reducing consumption inequality.

Taxing capital is an essential part of developing a tax system that is fair and based on an individual’s ability to pay. The idea that any taxation of wealth inevitably impedes economic growth is both overly simplistic and challenged by many experts and economists. As Nobel Prize-winning economist Joseph Stiglitz notes, “Rising inequality implies falling aggregate demand, because those at the top of the wealth distribution tend to consume a smaller share of their income than those of more modest means.”77

Taxes to fund the government and improve distribution are not necessarily in conflict with economic growth—in fact, the government is integral to a better performing economy.78 In particular, recent research shows that taxing wealth is unlikely to hinder economic growth when the tax falls on economic rents or if revenues from a wealth tax are used to make social welfare-enhancing public investments, which may have a higher rate of return than private investments.79 Economic rents in recent decades have reached near-historic highs and have significantly contributed to wealth inequality in the United States. Meanwhile, government investments in education and infrastructure can provide a positive rate of return for the economy as a whole; at a minimum, these investments are essential to sustaining a robust economy in the long term.80

A Wealth Tax Is an Economic Winner for America. It would be a powerful instrument for greater economic growth and success. Reinvested both across America and among those less wealthy than ourselves, a wealth tax would extend prosperity. Along with resources for climate crisis investments, America needs a revenue source for other public investments in addition to private investment and philanthropy. Greater public investment in America’s aging infrastructure, child care, and education will not only solve important problems but will also increase productivity in the long run and promote sustained and broad-based economic growth.” Easing student debt would boost entrepreneurship and homeownership rates, which have significantly declined as the costs of higher education have skyrocketed." A wealth tax could help with innovation and job creation—America’s entrepreneurial economy, despite its many successes, needs strengthening.” Put simply, a wealth tax would strengthen the American economy in ways that benefit all Americans.

“You have to look at the fiscal impulse from spending,” Mr. Powell said on Wednesday, referring to a measure of how much tax and spending policies are adding or subtracting to economic growth. “Fiscal impulse is actually not what’s driving inflation right now. It was at the beginning perhaps, but that’s not the story right now.” Instead, Mr. Powell — along with Mr. Biden and his advisers — says rapid price growth is primarily being driven by factors like snarled supply chains, an oil shock following Russia’s invasion of Ukraine and a from spending money on services like travel and dining out to goods like furniture. Mr. Powell has also said the low unemployment rate was playing a role: “Some part of the high inflation that we’re experiencing is very likely related to an extremely tight labor market,” he told a House committee earlier this month.

The same three economic variables in the United States, show the same increase in the central bank balance sheet as in other markets and only muted effects on money supply and inflation. Furthermore, inflation can occur without meaningful changes in the money supply, for example, during the oil crisis in the 1970s. Some investors are betting on inflation to follow the spike in the money supply in 2020. While this is possible, the money supply has been increasing for more than a decade but inflation has fallen consistently over the same time period.

Does government spending cause inflation? Now that we’ve looked at the definition and drivers of inflation, let’s address our question: does government spending cause inflation? The answer, roughly, is yes – and in other cases, no. Historical studies on government spending and inflation Studies of the historical link between government spending and inflation find that the link is tenuous. In particular, one study by the found that government spending has little to no impact on inflation. In fact, a 10% increase in government spending may lead to a 0.08% decline in inflation. Others have found that government spending around the world may have minimal impacts on inflation, often in the tenths of a percentage point. Government spending and Covid-19 On the other hand, modern studies have found that the current link between government spending and inflation may be stronger. In particular, the 2022 inflation spike followed two major federal spending programs under two administrations. The first, the CARES Act, passed in March 2020, while the American Rescue Plan passed in March 2021. Collectively, these initiatives aimed to minimize the economic devastation of Covid-19 by distributing three stimulus checks, expanding unemployment benefits and providing extra funds to state and local governments. While experts have credited these Acts with , economists have also found that their passage correlates with an unusual spike in inflation. By providing extra capital to American households, economists note, consumers were able to go out and spend money they wouldn’t have had otherwise. In turn, this increased consumer demand, pulling up prices. However, a recent analysis from the found that government spending only contributed to about three percentage points of today’s inflation. These findings corroborate an that suggested stimulus checks made inflation slightly worse – but not to the extent we’re seeing now. A full half of today’s inflation, they discovered, stems from ongoing supply chain issues as producers struggle to push out enough goods to meet demand. The war in Ukraine and resulting energy shortage, alongside a turbulent housing market, have also contributed to inflation, pushing up prices from several directions at once. Not all government spending leads to inflation However, not all government spending is correlated with higher inflation. It appears that the size and style of intervention matters. For instance, the recent infrastructure bill is unlikely to contribute to higher inflation. Measures like this aim to buff economic productivity instead of consumer wallets. In other words, instead of flooding the economy with capital via stimulus checks or tax cuts, they invest in new technologies and jobs. (Both of which, 17 Nobel-winning economists believe, could .)