Sunday, March 25, 2012

VAT Increase Is A "Supply Problem"

Scott Sumner notes that Britain both have low nominal growth and high inflation, or as he puts it have both a demand and a supply problem, but argues that the inflation numbers are "biased" because of a VAT increase.

Actually though, VAT increases, just like other tax increases, do create "supply problems" since they will cause the supply of goods and services at the old prices to decrease, raising prices and lowering real output. Tax increases, including VAT increases, are in other words a recipe for stagflation. Britain may have other "supply problems", but the increases in the VAT and various other taxes in recent years are certainly among the most important.


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