I was asked recently by an email correspondent if a government that uses taxes to control inflation will always end up taxing the middle class rather than the wealthy.
The argument put to me was simple and, at least loosely, based on modern monetary theory. If tax is used to take spending power out of the economy, and if governments are obsessed with short-term political survival, it was argued that they will target the taxes that influence the prices that matter tomorrow morning. That means that food, energy, rent, and transport might be targeted.
However, because the wealthy do not spend their extra income on those things, the claim was that taxing them would not reduce the sort of inflation that brings governments down. Middle-class incomes, by contrast, are thought to have a more immediate impact on these prices. The suggested conclusion was that governments, seeking short-term stability, will always tax the middle classes and almost never tax the rich.
It is an argument with just enough economic logic in it to sound plausible. But it is also wrong in all the ways that matter.
The basics
First, the basics are right. Tax does not fund government spending. Spending comes first; taxes come second. Tax helps control inflation by withdrawing some of the spending power the government has put into the economy.
And it is true that governments with short-term time horizons are particularly sensitive to price rises in the essentials of life. A government that lets food and energy inflation rise will face public anger.
It is also true that very wealthy households are not the cause of increasing grocery prices. No one becomes a billionaire and celebrates by panic-buying 300 tins of baked beans. That, though, is not the whole story.
The wealthy drive inflation
The conclusion is wrong because it misunderstands how inflation actually works. The leap from “the wealthy do not spend their extra income on food and fuel” to “taxing the wealthy cannot reduce inflation” does not hold true. This argument treats inflation as if it only happens in supermarket aisles, when in reality it originates across many parts of the economy, including those where the wealthy have disproportionate influence.
There are at least four major channels through which concentrated wealth creates inflationary pressure.
1. Asset price inflation drives real-world inflation.
Inflation is not only about the price of essential household commodities. It is also, and increasingly, about the cost of living in a system where asset prices have been allowed to run out of control.
So, when house prices rise, rents rise. When rents rise, businesses face higher premises costs and pass them on. Households facing higher rents cut back elsewhere or increase their debt. All of this feeds directly into consumer prices.
Asset inflation, as a result, becomes general inflation. And it is driven not by middle-class consumption but by those with the means to accumulate second homes, property portfolios and speculative assets.
2. The wealthy also bid up the price of scarce resources.
Inflation occurs whenever too much money chases too few resources. The wealthy chase scarce resources all the time; they simply are not the items in the supermarket.
They bid up the price of skilled labour in finance, consultancy, private medicine, law and technology.
They also bid up the price of the goods they buy to display their wealth; their so-called conspicuous consumption, and people have to make those items, however little they really add to the sum lot of human well-being.
And when private equity operations and multinational firms that target the wealthy raise some pay packages, the public sector and smaller businesses cannot compete. This alters relative wages across the whole labour market, and labour-market inflation can drive overall inflation (even if it does not always), meaning that taxing the wealthy can reduce some of the upward pressure they exert on these scarce resources.
3. Inequality forces others into debt, and debt-fuelled consumption is inflationary.
When too much income flows to the wealthy, many in the rest of society are forced to borrow to cope with the basics. Debt does not create more goods or services; it creates purchasing power without the capacity to pay. That is inherently inflationary.
Taxing the wealthy reduces the distortions that force households into this cycle, reducing an important inflationary driver.
4. Wealth concentration distorts investment and weakens productive capacity.
When too much wealth accumulates in the possession of relatively few people, it is rarely invested in productive activity. It is diverted into speculation, buy-to-let properties, financial engineering and activity focused on short-term gains.
This has serious consequences. Under-investment in productive capacity is one of the deepest causes of inflation: if the economy cannot produce the goods and services people need, prices will rise no matter how little the middle classes spend.
Taxing speculative gains and rents would shift investment toward productive, inflation-reducing activity instead.
In short, inflation is not simply the consequence of middle-income households buying too many basic commodities. It is shaped by the structural imbalances created by wealth concentration. Taxing those imbalances is therefore an essential tool for controlling inflation.
The real reason governments do not tax the wealthy is political, and not economic
The idea that middle-class taxation is an economically rational way to manage inflation is a convenient myth. The truth is more straightforward. It is that middle-class households are politically easier to tax.
They do not fund political parties. They do not employ battalions of accountants and lawyers. They do not relocate to Monaco. They do not dominate the networks of influence in which political decisions are made.
In contrast, the wealthy do such things. And successive governments, of all political colours, have been unwilling to confront that power.
So the pattern we see, of middle-class taxpayers squeezed ever harder while the wealthy enjoy extraordinary reliefs, is not about inflation control. It is about political convenience.
What a rational tax system would do
If we genuinely wanted a tax system that contributed to low inflation, social stability and economic fairness, it would look very different to the one we have. It would:
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Tax wealth properly, because wealth is where the inflationary pressures of housing, land and asset bubbles begin.
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Tax rents over work, because unearned income inflates costs while productive labour does not.
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Lighten the tax burden on middle and lower incomes, because they already pay disproportionately.
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Regulate essential sectors directly, because investment, price controls and public ownership stabilise essential goods far more effectively than taxing income ever could.
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Close the loopholes and reliefs that fuel speculation, from pension tax distortions to the preferential treatment of capital gains.
This is not radical economics. It is simply rational economics.
Conclusion
The idea that governments are forced to tax the middle class to control inflation is wrong. They do so because the middle classes are easier to tax and less able to resist.
A government serious about inflation, inequality, and stability would tax the wealthy because doing so works economically, socially, and fiscally.
The obstacle is not economic reality. It is political will.
Taking further action
If you want to write a letter to your MP on the issues raised in this blog post, there is a ChatGPT prompt to assist you in doing so, with full instructions, here.
One word of warning, though: please ensure you have the correct MP. ChatGPT can get it wrong.
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Richard if a person with wealth buys a very expensive car or watch, there is exchange of money value for the goods. There will in the case of a car be VAT to pay. The money value will in part go to the product producer who then pays staff and any taxes. My question is because of the limited amount of such sales/purchases not liable to have any effect on the economy as a whole. Perhaphs I have misunderstood or simplified an uncommon occurance.
I admit, I cannot work out what your question is.
From a quick look just after breakfast…………..
What I think the questioner is trying to say or my take on it might be that if the rich buy expensive cars or watches while it provides tax revenue and employment it doesnt distort markets in the way buying second homes does?
It is different of course, but I have already addressed the issue in that case in my piece.
Thanks for a really interesting post which directly address an issue on which our views have diverged (slightly). I’m not entirely convinced about all your arguments but there is undoubtedly some truth in them. I shall ponder. 🙂
Thanks again. 🙂
I’ve pondered a little and, for what it’s worth, here are my thoughts.
Excessive and growing inequality harms most people and is ultimately unsustainable. Hence the wealthy should be taxed more, and that the lack of such taxation is driven by political, not economic, reasons. Wealth accumulation by the rich does increase consumption and inflationary pressure, while taxing them could reduce both. However, the relationship between taxation and consumption is complex. For every pound taxed, the reduction in consumption is unlikely to be equivalent; it may take £10 in taxes to reduce real consumption by £1. Moreover, this reduction may be delayed, potentially taking over a year to materialize.
Consider how households in the top 1% of wealth (over £3 million) might respond to increased taxation. Such people are unlikely to cut back on everyday goods. Instead, they may reduce asset purchases—such as pensions, stocks, bonds, real estate, or luxury items like yachts and art. Initially, they might draw on cash reserves to maintain spending levels. For example, reducing pension tax relief could lead them to save less in pensions, which might paradoxically increase short-term spending. Since pension savings are typically invested in financial assets, changes here don’t immediately impact the real economy.
Similarly, taxing other asset classes may simply shift investment patterns without reducing real consumption. Cutting back on luxury purchases like yachts or art could lead to job losses in niche sectors, but these workers cannot be quickly redeployed into essential services like healthcare or education. Real estate sales would likely be slow to materialize and have delayed economic effects.
Ultimately taxing the wealthy may not proportionally reduce their consumption of real resources in the short term, though we can’t be sure without quantitative analysis. Wealth taxes are still necessary to address inequality. Over time, such taxation may lead to meaningful reductions in consumption. Importantly, the economy currently has enough slack—unused capacity—that increased public spending is unlikely to be inflationary. Thus, while the immediate effects may be muted, the long-term benefits of taxing the wealthy remain compelling both economically and socially.
You have to tax people with the money to pay. And people with more money (income or gains or a spending or assets) can pay more. It makes sense that taxes should be progressive, at least taken as whole, because each additional pound matters less to a billionaire than to someone on the breadline. But the tax system as a whole – particularly NICs and VAT – is much progressive than people realise.
One problem with taxing the rich is that they have the resources to be mobile. Some will leave. But I think that issue is overblown. The rich also have stores of assets and personal and business circumstances that anchor them. Some will stay and others will come. If they are only in the UK because they don’t pay much tax, and see no other reason to stay, do we really want or need them?
But there are also relatively few of them so taxing them more does not raise that much additional money. The UK has about 150 or 160 billionaires. For sure, each could pay a lot more tax. If each pays another £10 million, that is less than £2 billion. But there are 70 million other people. If only a quarter of them (broadly half of the income tax payers, call them the middle class) each pay £120 more, that raises more in total than the £10 million paid by each of the 150 or so billionaires.
Overall our tax system is deeply regressive, as I showed in The Taxing Wealth Report.
And I do not agree with those who say the rich are billionaires.
My line is very much lower.
Sorry. Should edit and proofread better. I meant to say the tax system is much *less* progressive. There is a focus on income tax , which is progressive albeit less than it could be after taking account of allowances and reliefs, but the impact of NIC and VAT and council tax in particular flatten it out a lot.
Accepted. But whichever line you take – £100 million, £10 million, £1 million – and all of those people are objectively well off – if you set it somewhere above the median, there will be more, often many more, people below the line than rich or wealthy people above. If your focus is on raising revenue and addressing deficits you are almost forced by the numbers to look at broad based taxes that reach the so-called middle classes and not just the rich or wealthy.
Phew! You are so reliable I was surprised by your claim and the need to differ. Thanks
Very much so Andy. If the policy suggestions in the Taxing Wealth Report are implemented and successful then it will reduce the deficit. If the government increases spending by even more than the revenue raised, so that means that the deficit always increases, then we have an expansion of the money supply and inflation at the core level does not reduce to target.
Elementary arithmetic shows that you cannot achieve the both in a zero growth economy.
Your argument rests on an assumption that simply does not hold: that in a zero-growth economy government spending must match tax revenue if inflation is to remain on target. That is not how a sovereign-currency system works.
The Taxing Wealth Report proposals are not designed to eliminate the deficit. They are about changing who pays tax and what behaviour the system encourages. If implemented successfully, they would reduce inequality, curb rentierism, and release real economic capacity currently wasted. That shift would, almost inevitably, lower unnecessary government borrowing because the economy would function better.
A government deficit is not mechanically inflationary. Inflation arises when total spending exceeds real productive capacity. If the government spends more but that spending creates capacity — by reducing inequality, improving services, increasing employment security, cutting rent extraction, and better distributing demand — then the deficit can rise without causing inflation. That is standard MMT reasoning and is borne out by long-term evidence.
Nor is there any contradiction in running a deficit within a zero-growth economy. Zero growth does not mean a static economy. It means that real output does not increase overall. Even in such a setting, a deficit may be essential to maintain employment, support incomes, and stabilise private-sector balance sheets. The issue is whether the spending aligns with available resources, not whether the deficit matches tax receipts.
The “elementary arithmetic” you refer to — that spending greater than revenue must always be inflationary — is incomplete. It ignores the private sector’s desire to save, which requires government deficits by accounting identity; the fact that tax controls inflation rather than funds spending; the way inequality suppresses demand and creates unused capacity; and the slack that already exists in the UK economy, regardless of GDP growth.
In short, the arithmetic is only ‘true’ within the assumptions of orthodox economics. Change the assumptions to reflect the real operation of a monetary economy and the conclusion changes.
The real constraint is resources. If government spending uses those resources well, a deficit is not only sustainable but often necessary. If spending exceeds capacity, inflation follows — regardless of the deficit. The deficit is the outcome of economic activity, not the lever that controls it.
1st rate, read the headline and thought – hang on the rich do cause inflation – but answered in the main body of the text.
Problem. The explanation is complex(ish) & would be difficult to convey on the e..g radio or in the gladiatorial events which pass for TV these days (economically illiterate TV talking head, interviews you and right-whinge nut). Perhaps one way forward is via MPs although many will probably file such letters vertically.
Maybe the 1hr interviews done by the likes of Novara (or indeed your own vids) are the way forward – but how to max’ the audience.
Criticism accepted.
I will try to simplify, if I get time. And I am only working 12 hours a day right now, so there must be some more to find.
Sent a prezzie for you via e-mail.
Will look
The argument runs that if you tax rhe rich they will invest in other countries but they do that anyway since profit is maximised by minimising inputs. This is why being a member of a large trading bloc is so important it can block this tactic if minimising imputs is unfairly implemented and it is. Minimising spending on public goods and services is one such tactic because it minimises taxation. Imposing a government toll on the exchange rate and using that money to purchase the currency of target export countries through buying their treasury bonds is another particularly when it has the additional effect of inflating the curency values of those countries boosting its import power. This is why Brexit was such a big mistake or rather the wrong answer to Britain’s de-indusrialisation.
Hello Richard,
My first time commenting on your blog, though I am a long-time reader and fellow Quaker.
This is such an excellent post! I just had to comment!
This busts the myth that Gary Stevenson peddles. It exposes cowardly politicians who shrink and kowtow to the imagined power of wealth. You make it crystal clear how the wealthy fuel inflation.
Well done. Please keep up this important blog which has now become a thriving family enterprise. I know it may feel like you are bashing your head against a brick wall, but I feel that under your pressure, the wall is beginning to crumble and we see daylight beyond and a land where economic sense and the politics of care can emerge.
In Friendship
Jim
Many thanks, Jim and much appreicated, Friend.
Another related argument(excuse) I hear often is that taxation on unearned income will cause capital flight. Is that a topic you could revisit?
Let me think about that
V helpful, I too had that question, and this answers it.
A conclusion from your reasoning, is that taxing wealth is not a matter of creaming a bit off the top. To achieve the results you describe, we are talking serious redistributive taxation, rather than capturing a little bit of the surplus.
I’m all for it, but they will howl… but let ’em howl. The poor aren’t howling, they are dying.
Correct
And wait for my budget section on this….
One interesting comment I came across in my reading was that very few if any Japanese executives earn more than £1 million
Why don’t we have the same culture of restraint in the UK and US economy
Good question
My critical response to your narrative would be;
1. Claiming asset-price inflation (housing) mainly stems from “the wealthy” is false: most post-2008 house-price rises were driven by low interest rates and middle-class mortgage borrowing, not multi millionaire portfolios.
2. Taxing the rich does NOT reduce debt-fuelled consumption by the poor: borrowing is caused by stagnant real wages and loose credit, not by untaxed billionaire income.
3. Wealth concentration does not “weaken productive capacity”: capital has never been more globally mobile or invested in high-productivity tech; supply-side inflation today comes from energy shocks and supply-chain disruption, not “speculation vs production” choices by the rich.
Just my opinion but there you go. Hard to say who is right or wrong but i understand your arguments.
Thank you for engaging so constructively. Let me respond to each point, because the issues matter and the evidence suggests that taxing wealth does play a role in reducing inflationary pressures.
First, I agree that low interest rates after 2008 drove house-price rises. But cheap credit operates within an existing structure of wealth inequality. Those who already owned property — especially landlords and older, asset-rich households — were consistently able to outbid first-time buyers. That effect amplified the impact of low rates. Wealth concentration in housing also encouraged leveraged speculation: people who already had property borrowed against it to buy more. That dynamic pushed prices far beyond what median earners could sustain. Taxing property wealth would help break that cycle.
Second, you are right that borrowing among lower-income households is driven by stagnant wages and loose credit. But the link with wealth inequality is real. When an undertaxed wealth-owning class extracts more from rents, dividends and speculative gains than the productive economy generates, the distributional consequences push others into debt simply to maintain basic living standards. Inflation is always a distributional problem. It is not just about the quantity of money, but about who holds command over resources. Taxing wealth shifts purchasing power away from those whose consumption is largely discretionary and towards those who spend more proportionately on essentials, reducing debt-fuelled demand pressures.
Third, although global capital invests in technology, domestic productive capacity has been weakened by long-term under-investment in skills, infrastructure, energy resilience, care and manufacturing. Meanwhile vast sums have flowed into property speculation, financial engineering and share buybacks. That is not neutral. It is a choice shaped by wealth concentration and by the tax incentives that privilege unearned gains over productive investment. A fragile economy with constrained supply is more inflation-prone.
Taxing wealth will not solve every problem, but it is part of a strategy to reallocate resources from passive accumulation into productive use. That, I think, is essential if we want an economy that works for most people — and is less vulnerable to inflation.
Nice reply, i don’t agree with it all but i respect and understand what you say.