Inflation continues to surge, increasing at a 7.9% rate in February, the largest increase in four decades. For a majority, consumer prices are rising at the fastest rate in their lifetime, with prices skyrocketing for gasoline, food, and shelter, the main household essentials.
Inflation is also effectively imposing a significant tax increase on the economy. Income taxes, sales taxes, and property taxes are all increasing due to inflation.
According to the latest Treasury Department monthly statement, total government receipts are up $371 billion for the first five months of the year, an increase of 26%. Individual tax receipts are up 38%, and corporate tax receipts are up 31%.
A Congressional Budget Office report shows that a 1% increase in inflation increases individual income taxes by 1.1%. That means today’s inflation will increase income taxes by 8.7%, a tax increase of $1,795 on a typical median-income family.
Inflation is also increasing the tax on capital investment and savings. As the CBO notes, income from capital gains, dividends, and interest is not adjusted for inflation and thus faces higher taxes from inflation. The higher taxes reduce the incentive to save and invest, decreasing business investment, income, and jobs.
These higher taxes, along with the higher inflation, pose a real threat to our economic recovery.
Bruce Thompson was a U.S. Senate aide, assistant secretary of the treasury for legislative affairs, and the director of government relations for Merrill Lynch for 22 years.
