Economist Doubts High Taxes Stop Inflation

Press, Volume CI, Issue 29746, 13 February 1962, Page 3

Economist Doubts High Taxes Stop Inflation

(New Zealand Press Association)

WELLINGTON, Feb. 12. Doubts were cast at the annual conference of the New Zealand Association of Economists on one of the theories largely responsible for the use of high individual taxes as an anti-inflationary device in the post-war period. Th.e speaker was Mr A. J. L. Catt, senior officer in the New Zealand Institute of Economic Research. Because there had been a surplus of money in circulation in the post-war period it had been contended that restrictive monetary policy was largely ineffective because it tended to be offset by the activation of previously idle money, said Mr Catt. It had. therefore, seemed that when expenditure needed curbing a more effective way was to tax income away from people. Mr Catt contended that this argument was fallacious because it did not take account of who, in fact, were the holders of the idle money.

Since few firms, institutions 'and active individual investors allowed idle balances to accumulate, the balances that did accumulate must be held by individuals who were not interested in lending their funds, either because of ignorance or perhaps because their individual

balances were too small to make the income to be earned worthwhile. If this were so it would not be true that, when monetary policy restricted the volume of lendable funds, disappointed borrowers would easily •’tap" these idle balances because, unless extraordinarily high rates of interest were offered, these holders of funds would retain them.

It was true that financial intermediaries tended over a time to mobilise these funds, but this was a steady process not subject to the short term changes which would be necessary to offset short term monetary measures.

An interesting corollary, Mr Catt said, was that individual income tax, which economists had preferred as an anti-inflationary device, was in fact particularly likely to be rendered ineffective by the large volume of money, because even if individuals would not lend to replace a shortage of loanable funds, there was little doubt that they would tend to draw upon their own balances rather than reduce expenditure when faced by heavy taxes. Thus most people in the tax brackets had liquid reserves of some kind, with the result that to achieve a given restraint on expenditure, a much larger amount had to be removed by taxation or else the taxes had to be levied on those who had no liquid reserves on which to draw.

Not only was this politically unpopular but also it was socially unjust. While not contending that fiscal policy should be disregarded, Mr Catt thought that, governments would be wise to give more attention to monetary policy in future, in particular to the achieving of greater support from investors for government loans.