With interest rate rises, the people in the most debt suffer the most. With tax rises, the highest paid suffer the most, and the govt has extra revenue to help the ones struggling the most. This is never considered by any govt. Why not?
In: 1129
The federal reserve, an independent body, can raise and lower rates and buy or sell bonds to influence the money duly without approval from Congress or the President. Raising and lowering taxes requires approval from the Congress which is much more difficult. However representatives from the Fed will sometimes appeal to congress to take “legislative“ action.
The government should raise taxes. Rich people have better lobbyists than poor people do. These lobbyists and campaign donations from rich people convince politicians that they should not raise taxes.
[deleted]
Thank goodness Congress isn’t in charge of interest rates – we’d all be stuck in an endless CSPAN loop!
The RBA or reserve bank in most demographic countries are not controlled by the government but an independent organisation so that political parties are not able to influence decisions made by the bank.
Increasing tax would effect a response, one that might – and I use the term might achieve a similar response, but it’s not going to be popular with anyone.
Because slowing the economy isn’t the goal.
The goal is to reduce the money supply. That’s done by the central bank (fed reserve in US) selling its assets (the money itself was created when the central bank bought the assets, and the assets are what’s backing the money). Because their assets are debts, that causes the interest rate to raise, too.
Also, the most affected by the interest rate raise are the ones that need to take new debt (including renewing a debt that needed to be paid but is paid by taking a new one) or that have a variable debt. They are mostly companies, the government, and people with a variable mortgage. In other countries, people with regular mortgages may be affected because they often need to renew them every 5 years. So, most people with debt aren’t affected. Actually, rich people tend to be affected by the drop in values of their investments because companies are affected.
Increasing taxes affects consumer spending much slower than increasing interest rates affects bank activity.
What you’re talking about – using taxes instead of monetary policy to control the balance between inflation and unemployment is called Modern Monetary Theory if you’re looking for further reading. (Not an ELI5 but then nothing else in this thread is…)
Taxes are mostly for the people. Interest rates are mostly for the businesses. When you make it more difficult for businesses to loan money, they get it more difficult to operate which in turn can slow down an economy that operates too fast and needs to be slowed down. This is often done to curb inflation.
Only ~60% of US households actually end up having any tax liability. So, if congress raised taxes, it wouldn’t actually effect everyone. Raising interest rates effects everyone with mortgages, car notes, credit cards.
https://www.cnbc.com/2022/10/28/more-than-40percent-of-us-households-will-owe-no-federal-income-tax-for-2022.html
Latest Answers