Advanced economy governments do not need taxes to fund spending. For over 10 years the U.S. has heavily relied on the Fed to finance its ever increasing public spending, with limited effects on consumer prices or the value of the dollar. The same observation can be made in a number of advanced economies. A fiat system that holds the confidence of the public does not need taxes to fund itself (but things change when that confidence is eventually lost). Yet, the Administration is keen on raising personal and corporate taxes to “fund infrastructure.” Another way to view these efforts is simply as a public policy tool to carry out the Administration’s plan on reducing wealth inequality, a byproduct of accommodative monetary policy. In this post we review the policy trade offs in a lower for longer stance, how income inequality leads to asset price inflation, and how taxing the rich in turn moderates asset price inflation.

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