A Maine State Senator said Thursday lawmakers need to increase taxes on wealthy Mainers.
“We need to tax the wealthy more,” said Sen. Mike Tipping (D-Penobscot).
“We need to increase taxes on those wealthy individuals and those wealthy and profitable corporations that have rigged the system in their favor,” Tipping said.
Sen. James Libby (R-Cumberland) then took the opportunity to ask whether Tipping understood where inflation comes from.
Asked whether there’s a connection between an increase in the U.S. money supply and inflation, Tipping blamed “corporate profits,” though he admitted he couldn’t be sure whether an increase in the money supply played a role.
“When we did see inflation, it was because of supply changes and corporate profits,” replied Tipping.
“I can’t speak to the money supply and fiscal policy. I do know that changing that has had some effects especially recently,” he said.
Blaming inflation on “corporate profits” and corporate greed is a piece of rhetoric most commonly associated with Sen. Elizabeth Warren (D-Mass.), Sen. Bernie Sanders (I-Vt.), and the socialist impulse to blame society’s ills on capitalism, free markets, and successful entrepreneurs.
In order to believe that greedy corporations cause inflation, you would have to also believe that — for some unexplained reason — these same corporations all decided at the very same time to stop being greedy. For example, from 1991 to 1998, consumer prices fell. According to the Tipping-Warren-Sanders theory of corporate driven inflation, you would have to assume that the corporations decided for some reason to refrain from their greed.
Similarly, from 2011 to 2015, consumer prices fell, before rising from 2015 to 2018, and then falling from 2018 to 2020. Again, the theory that corporate profits drive inflation would lead one to conclude that corporations were greedy for four years, stopped being greedy for a little bit, then got greedy again, then stopped, and now they’re greedy again. It’s a silly idea, right?
The idea that taxing “wealthy corporations” would somehow rein in inflation is even sillier.
If you believed greedy corporations are so greedy that they pursue profits even if it means causing inflation, then you’d have to believe that they remain greedy when taxes go up. Yet Tipping seems to assume corporations will stop being greedy if taxes are increased. But why wouldn’t greedy corporations just raise prices, passing along those tax hikes to consumers, in order to account for what they give up in new taxes? Supporters of the Tipping-Warren-Sanders theory of inflation and taxation have never really found an answer to that question (other than using the government to artificial cap prices).
Since advocates for this theory of inflation haven’t explained why the intermittent greediness of corporations would fluctuate so wildly, and then stop altogether when taxes are raised, perhaps there’s something else that might explain inflation?
From a general perspective, it makes since that business would increase prices when the purchasing power of the dollar declines.
If you’re selling an apple for $1.00 and suddenly a dollar is worth 75 percent of what it was when you first set prices, it’s only rational to increase prices. Further, the business selling orchard supplies will be reacting similarly, raising prices on you, so you’ll also want to account for that with price increases.
Businesses large and small raise prices during periods of inflation in order to stay afloat. If firms did not raise prices to offset inflation, then they would soon fail. At the end of the year, they may have a large amount of sales in nominal dollars, but since the value of those dollars has increased, their true economic gain has remained the same.
Price increases may appear in some cases to precede measures of inflation, but that may be attributed to businesses preparing for an anticipated increase in inflation. If our apple grower expects the value of a dollar to decline, then he will increase apple prices rather than waiting for inflation to harm his bottom line. This isn’t greed, this is rational economic behavior.
A host of economic researchers have studied the Tipping-Warren-Sanders theory of inflation, especially following the high inflation experienced following COVID-19, government lockdowns, and massive deficit spending by central governments. While there may be some corporations who seize on inflation to gouge consumers, there is little evidence to suggest that all corporate profits rise when inflation rises.
Martin Andler and Ann Kovner, writing for the New York Fed’s “Liberty Street Economics” blog, found scant evidence corporations are gouging consumers and thereby causing inflation.
“The relationship between changes in corporate profits and inflation is positive even when inflation is unusually high,” they wrote. “This only means that those industries with higher inflation are able to increase profits more than industries with lower inflation, not that profits are increasing.”
“Profits are falling overall, and it’s just that companies in higher inflation industries have profits that are falling less quickly,” they wrote.
As Sen. Libby suggests, increases in the money supply plays a dominant role in inflation. Consider that the recent period of high inflation just so happens to coincide with unprecedented increases in the money supply.
When you increase the amount of dollars in an economy, the existing dollar supply loses purchasing power. That, in turn, causes corporations large and small to react rationally by raising prices, much as they’d raise prices in response to any tax increases. In that view, the burden of increasing the money supply and increasing taxes are both borne by consumer.
So why does the Tipping-Warren-Sanders theory of inflation and taxation persist?
It’s politically useful if your goal is accruing to the government a larger share of society’s wealth. Higher taxes on corporations may be passed along to consumers in the form of higher prices, but the government will collect a bigger piece of the pie. Progressive politicians enjoy the power that comes with spending more and more tax dollars.