The “Inflation Tax” Is Regressive

By William McBride & Alex Durante of The Tax Foundation. Excerpt:

"New analysis from the CBO underscores how low- and middle-income households have been impacted by the current inflation wave. The paper shows that prices for goods consumed by the lowest income quintile have risen faster than those for goods consumed by households in the highest income quintile—4.6 percent versus 4.3, respectively—on an annualized basis from 2019 to 2022.

The differences are mainly driven by higher prices for food and energy, which comprise a larger share of the consumption for low-income households compared to higher-income households. Additionally, services other than rent account for a larger share of consumption for high-income households—32 percent compared to 23 percent—and have experienced less price growth than goods over this period.

Distributional concerns typically dominate in debates about the fairness of various public financing sources, but there are other things to consider, such as procedural fairness. How procedurally fair is it that inflation appears now to be the primary means of financing pandemic relief spending, more than a year and a half after the $1.9 trillion American Rescue Plan was enacted and more than two and a half years after the first relief package was enacted?

Very few people (voters or elected officials) anticipated this inflationary outcome, but many did voice concerns about the impacts on the deficit and the national debt. It seems clear now in retrospect that one of the major downsides to deficit spending is the unknown liabilities it creates for future taxpayers and consumers and the potential destabilizing macroeconomic forces it unleashes. It is incumbent upon our elected officials to take that into account, even during the emergency of a pandemic.

Now that the emergency has passed, our elected officials should spare people further harm from the inflation tax by committing to sustainable, balanced budgets."