Subject: VARIATION OF TAX RATES TO BALANCE SUPPLY AND DEMAND Comment: At the present time, the Federal Reserve can only increase or decrease the availability of money and credit. However, imbalances between supply and demand require instead a shifting of monetary resources between the two. This can be accomplished by shifting the tax burden between investors and consumers. When an excess of consumer demand threatens us with inflation, all the Fed can presently do is reduce both demand and supply. When an excess of supply threatens us with deflation, all the Fed can presently do is encourage an increase in both demand and supply. This does not make a great deal of sense. It does little to eliminate the boom/bust economic cycle. Fed tightening periodically causes recessions which enormously damage many businesses and families. One solution is to empower the Fed to shift the tax burden between investors and consumers. For example: 1. Reduce tax rates on high incomes and increase them on low incomes to encourage supply and constrict demand, or vice-versa. 2. Reduce tax rates on capital gains, dividends and interest to encourage supply, while increasing tax rates on earned income to constrict demand, or vice-versa. The tax code could set standard rates and could authorize the Fed to raise and lower these rates as needed, requiring that the net effect should be revenue neutral to the extent possible. Fiscal policy, i.e., the overall size of the revenue in comparison to the Federal budget, would remain in the hands of the President and Congress. Legislation has always been both tardy and over-reactive in dealing with changing economic circumstances. The Fed can act more promptly and gradually, as it now does in setting interest rates. The result should be more consistent and therefore greater growth without inflation or recession: a healthier economy with less pain. |