Biden vs. Bezos -Higher taxes on the wealthy will make inflation worse.

Raising taxes on high-income earners will not reduce consumption but reduce capital formation, making inflation worse.

Recently, in the back-and-forth exchange between the Biden Administration and Amazon CEO Jeff Bezos, Biden said he wants to raise taxes on the wealthiest Americans to help reduce inflation. The reality is that over-taxing the wealthy will increase inflation.

Former Secretary of the Treasury Larry Summers, a progressive Democrat who has criticized Biden’s spending, agreed with Biden on this point and criticized Bezos.

“I think @JeffBezos is mostly wrong in his recent attack on the @JoeBiden Admin,” Summers recently tweeted. “It is perfectly reasonable to believe, as I do and @POTUS asserts, that we should raise taxes to reduce demand to contain inflation and that the increases should be as progressive as possible.”

The problem is that higher taxes on the wealthy will not reduce demand and will eventually reduce supply, making inflation worse. Higher taxes will only reduce demand if the tax increase results in a decrease in consumption. Raising taxes on the wealthy will not reduce consumption but rather will reduce savings, which has no impact on demand in the short term and makes inflation worse in the long term. Why?