To control inflation and reduce consumption, the Central Banks increase interest rates (eg UK). Wouldn't it be more beneficial (improved public services and infrastructure) to increase consumption tax like VAT? Or other taxes? (I did have a search to see if something similar was asked but couldn't find it). With increasing rates it just feels like my bank (mortgage) is getting richer for nothing.
Wouldn't increasing tax control spending and consumption as well?
Taxes do not reduce inflation when government spends money they tax. Inflation dynamics can be described using Philip's curve:
$$\pi_t = \pi^*_t +\beta(y_t-y_n) + \epsilon_t$$
where $\pi_t$ is inflation $\pi^*$ inflation expectations, $y_t$ real output and $y_n$ natural output and $\epsilon_t$ is vector of shocks.
Now increasing taxes and funding infrastructure as you suggest, depending on macroeconomic parameters, could lead to increase in $y_t$ or keep it unchanged (since government spending is part of output), and because distortionary taxes such as VAT or income tax create deadweight loss they could actually lower potential output $y_n$ (depending on what they are spent on). Massive government spending could also potentially increase inflation expectations, even if it would not change them it would for sure not lower them.
Hence your proposal simply does not lower inflation.
In order to lower inflation through tax hikes, there would have to be only tax hike without government spending that money on public services. This would lower current $y_t$ and help reduce inflation. Moreover, it is well known rule in optimal taxation that distortions increase disproportionally with size of tax so this would not be solution if taxes get so high that they cause too large drop of $y_n$. US does not have that high taxes so they could increase them, but this extra tax could not be spent on any public services as you suggest but just locked on account not to be used.
Next, low interest rates both increase $\pi^*$ and $y_t$ so that would still be part of problem that would either have to be dealt with even higher increase in taxes.
Whether doing this is ‘beneficial’ depends on social welfare function that you use to analyze a problem. Under some arbitrary social welfare function anything you like can be beneficial.
As suggested if taxes are increased governments are inclined to increase spending on such as health, lower income citizens, infractructure etc which could increase inflation and little accomplished. What if the new tax increase was directed to reduce the debt which is considered to be too high? Even better would to reduce the tax increases until the inflation has reached the ideal so-called of 2%. The taxes resulted are probably ten times larger and probably include almost everyone not just the overextended mortgage or borrowing few and would take effect in a month not years.
Great question. We should increase certain taxes instead of just interest rates.
It may help to specify what tax to increase. Corporations set the price of their products. If inlation is increasing prices, then corporations are ultimately responsible for that part of inflation. Housing inflation is different. Higher housing prices come from people wealthy enough to purchase another home or pay over value for property. If taxes were increased on those two groups specifically, other taxes unchanged, that should curb inflation too.
Some corporations increased prices to survive, but most raised prices to make more profit. Corporate income and capital gains taxes are historically very low (in the US anyway). Rarely in the last 100 years has it been better to make profit and pocket it instead of invest in their company. (An exception being the 1920s.) Higher taxes on very large corporations would encourage them to spend their profit on higher wages, more employees, new equipment or any other reinvestment into their company (true capitalism). Generating large profits lets them buy smaller companies or competitors to buy sales and cut staff. Another use for large profits is to give it to shareholders. That can can exacerbate inflation if those shareholders then invest in commodities and drive up the price of oil, metals, or food.
Higher taxes would not necessarily lead to more spending. It should go to pay off debt and the deficit. Democrats may "tax and spend", but the Republicans have cut taxes and spent even more. The result is an astronomical federal deficit and debt. It made some companies and people rich, but we and our kids will have to pay it off someday.
If you want an example, look at the tax rates during the 1990s. Slightly higher taxes on the top brackets, regular inflation, high employment, and a balanced budget.
Interest rates and extra taxes have too slow an impact on inflation.
Since Inflation is usually caused by inducement rather than natural causes, then lending to purchase from those causing the inflation should be curtailed, (ie those who have a reasonable control over their market, think monopolistic control). The impact would be quick. I know that this interferes with the free market advocates, but then so does an artificially high interest rate.
We may even think the unthinkable and break up those that have gotten to big for their britches, such as the breakup of AT&T.
A question I have asked many times but not got an answer that makes sense to me. Increasing TAX keeps the money in the public purse for use in public services. Interest rates hikes and tax hikes have the same impact on inflation. They reduce ability to spend thus curbing inflation. So why not manage inflation with TAX, keeping money in the public purse rather than through interest rates where money goes to banks/shareholders?
