As we enter the eighth month of 2022, many are worried about inflation and a looming recession. Both are currently happening and inevitable. As a working American, we are now faced with deciding if we are going to spend money on groceries, fill up our gas tanks, take the family on the annual trip, or if the price of something we want trumps things that we may need.
We chose to stay in and make dinner at home versus going out to a restaurant a last weekend. At the store I purchased everything I needed to make a restaurant type meal at home all for $90 at the store. We had little for leftovers. After I got done cooking and cleaning, I thought to myself, “We probably could have just gone out to eat for that price”. The cost of living has gone up for most no matter where we live.
This brings me to some recent news released about the effort the senate is trying to make about curbing inflation. There is a “flawed assumption” that creating a reconciliation bill will shelve the much discussed “Build Back Better” bill and temporarily halt any spending increases. Instead, recently introduced is the “Inflation Reduction Act of 2022”, which aims to include a 15% corporate tax, controls on prescription drug prices, increased IRS enforcement of taxes, and significant increases in spending on energy and health insurance, and a reduction in the deficit.
The idea that “tax increases reduce inflation” is preposterous. There is no proof behind this motion. The thought behind this is that taxes exceeding spending will reduce inflation. Although the current inflation has a lot to do with overspending, it is important to look at what caused such overspending. The federal government spent more than “$5 trillion”, 27% of GDP, during the pandemic. That is on top of the spending that is usually conducted. All due to pandemic benefits provided to citizens. That stimulus check and those child tax credits – they are a large part of the reason why there was overspending by the government.
So many people were excited the “government gave us all free money”. Essentially, that money is never free because us, taxpayers, will eventually pay the price and be paying it back in some form or another. Right now, that form is inflation.
The Federal Reserve has increased interest rates to decrease inflation. Increased interest rates reduce the amount of credit provided and those making large purchases because they don’t want to pay higher interest rates. Last time there was a recession, I saw credit companies decreasing credit limits and increasing interest rates which affected me on a personal level. So, what did I do? Spend less and save more.
Raising taxes for large companies will result in a reduction to the incentive to hire, produce goods and services, and thus put a damper on their overall ability to continue to stay profitable. Taking charge and penalizing drug companies and controlling their drug prices will reduce the innovation of drug creation and have a significant impact of access to life-threatening cures and treatments. Increases in capital gains and other taxes to those with higher incomes will discourage saving and favor consumption. Ultimately, the thought process behind raising taxes will result in effecting the growth of the economy and be more harmful to all walks of life.
How do we fix this and how do we fix it so that inflation can be combated? Better treatment of capital investment, layers reduced on corporate income, reducing tariffs, lower marginal rates on the income tax base, broaden income tax base, and expand the options for better saving. (Most recently, my financial advisor offered me a 3% CD. When I did the math, it was a mere $900. Sure that $900 is more than I had to start, but as someone who saves, it would make more sense to move my money over to my financial firm if there was more than $900 involved. I just wasn’t sold.)
If we look back to during the 1980s when the debt and deficit increased, there was a significant decline in inflation, which can provide insight into the though process behind reducing the debt and deficit because reducing it, had no bearing on the reduction of inflation. Faster economic growth that continued into the 1990s was the biggest contributing factor to attacking rising inflation.
For me personally, the way I look at the recent inflation and how I combat it is by weighing all the options in relation to what I am trying to do, or what will result in the best overall outcome, financially. What makes the most sense?
For example, when looking at recent VRBO’s, the overall cost of staying and being nearest to the location of where I might be traveling was a factor of whether it would make more sense to use items I already have and find a campsite or settle for staying at a VRBO. I would be paying between $600-$1000, still must drive to the location (fuel costs), bringing food to cook or choose to dine out (food costs), and additional costs such as fees associated with booking a VRBO as well as the availability.
Overall, when I took into all the costs and what I could do to combat the increase in prices it made more sense and was more cost effective to book a campsite and spend a few days in the elements and be closer to the beach.
This is just one of the examples that I do to maximize my hard-earned money during this unprecedented time.