The U.S. needs to get real about taxes and inflation

The Twitter spat about taxes and inflation involving President Joe Biden, Amazon.com founder Jeff Bezos and former Treasury Secretary Larry Summers has served mainly to prove that Twitter is a bad place to attempt intelligent debate. Still, the point at issue matters. It deserves a slightly less abbreviated treatment.

Last week, the president tweeted, “You want to bring down inflation? Let’s make sure the wealthiest corporations pay their fair share.” Bezos replied: “Raising corp taxes is fine to discuss. Taming inflation is critical to discuss. Mushing them together is just misdirection.” Summers declared Bezos “mostly wrong” — an oddly harsh assessment coming from a trenchant critic of the administration’s earlier fiscal planning.

Fact is, Bezos was making a fair point.

Getting inflation back under control means reducing the current excess of demand over supply. The Federal Reserve has begun to do its part by raising interest rates and telling financial markets to expect further monetary tightening. But fiscal policy affects demand as well, so the administration and Congress need to help by restraining the budget deficit — at a minimum, adding no new fiscal stimulus until inflation subsides.

Higher taxes on the “wealthiest corporations” (actually, the administration has proposed to raise taxes on all corporations) would indeed reduce the budget deficit, other things being equal, which would lessen the pressure of excess demand. So if the administration were proposing no other budget changes — and setting aside the supply-side consequences of higher taxes on profits and investment — the president could fairly describe the idea as a way to help the Fed fight inflation.

But the administration is also proposing big increases in public spending. Its puzzling new dead-on-arrival budget would raise taxes on profits and high incomes enough to lower deficits slightly compared to what they would otherwise be — yet still would yield projected shortfalls of well over $1 trillion this year, next year and for the foreseeable future. That’s high by historical standards and enough to keep the public debt, already elevated by the pandemic’s emergency measures, on a steadily rising path.

The budget numbers are flattered for the moment by the recovery, the ending of COVID relief programs, and very high inflation (which boosts tax revenue even with unchanged tax rates). Yet by no plausible yardstick is the Biden administration calling for deliberate fiscal restraint. It’s still pitching tax and spending plans that would only add to the short-term inflationary pressure. And as Bezos also pointed out, if it weren’t for resistance from Sens. Joe Manchin and Kyrsten Sinema, the president would already have pushed through a far bigger fiscal package than his latest bid.

Budgets need to be judged line by line to assure taxpayers they’re getting value for their money, and then overall for macroeconomic purposes. As part of a responsible budget, higher corporate taxes could well make sense, so long as the changes were designed to shield new investment. But the president appears to see extracting a “fair share” from “wealthy corporations” as an end in itself — not as a way to finance necessary spending, curb the deficit, improve the economic outlook or fight inflation.

As they stand, Biden’s fiscal plans won’t help the Fed do its job. “Misdirection,” as Bezos put it, seems mostly right.