I have a short piece in The Age today [over the fold] on inflation and tax cuts.
Tax Cuts: What the Experts Say
Joshua Gans, The Age, 13th February, 2008.
The prospect of lower income taxes can fuel inflation especially when they are expected to stay that way. In this environment, to shift the weight off monetary policy in fighting inflation, the government does have other fiscal levers it can pull. It can reduce expenditures but this may disproportionately hurt the poor. More alluringly it could have a temporary rise in the GST. This would impact on consumption immediately as consumers delayed unnecessary expenditures. By doing this, the government can potentially offset income tax reductions whose impact is muted by savings behaviour. Thus, the pain of higher taxes is short and widespread but the impact in reigning in aggregate demand is stronger.
Even beyond the traditional macroeconomic instruments, consider the opportunities here to enact environmental policies that raise costs of dirty consumption goods. Right at this moment these would have a dual impact of fighting over-heating wherever it is occurring – the economy and the environment.