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37 Tax Foundation's Tax Review 1 (1976)

handle is hein.tera/tafoutaxt0040 and id is 1 raw text is: Tax     Review            JANUARY 1'26
Vol. XXXVII, No. 1
More Inflation: More Unemployment
By David I. Meiselman

In the past year we have all seen many reports
detailing the faltering growth of the American econ-
ony over the last decade. In my view, the slow-
down in capital formation and in economic growth
in recent years is a problem of major dimensions. I
believe that the American tax system, which is
heavily biased against saving and investment, is a
significant factor in this sluggish performance. By
causing a shift of resources from capital formation
to consumption and to government spending, the
Federal tax system clearly impairs efficiency and
retards growth and innovation.
Despite all the discussion of tax reform, we have
had essentially the same tax code over the last dec-
ade. Ten years ago the Federal tax structure was
also biased against saving, investment and economic
growth. Since then, one of the most important
changes which has taken place has been in the infla-
tion picture. A decade ago the price level was
essentially stable. Since then, the United States has
experienced virtually continuous inflation, and the
pace of inflation has ratchetedi up in every business
cycle. And in each business cycle the amplitude of
fluctuation in prices, employment and the like has
also become greater. In other words, there has been
an increase in both inflation and in instability, an
association I do not believe is coincidental.
I suggest that one way of interpreting the slow-
down in economic growth and in capital formation,
and much of the upward drift of the unemployment
rate, is that they are all the results of a decade of
accelerating and roller-coaster inflation. The poor
economic performance is part of the wide range of
economic, political and social adjustments to forces
generated by the inflation. Inflation, itself, has been
Copyright 1976 by Tax Foundation, Inc., 50 Rockefeller Plaza,

a product of poor public policy, notably the Federal
Reserve's monetary policy. I have concluded that
the conventional wisdom among most public officials
and economists regarding the impact of inflation is
regretfully, incorrect. This is the view that inflation,
while bad, is not an unmitigated evil, because it
stimulates employment and capital formation. I
argue, on the contrary, that inflation leads to both
more unemployment and less capital formation and
growth. Indeed, I would contend that inflation by
itself would lead to more unemployment even if we
had a tax system that was not biased against capital
formation, a bias which is strengthened by the in-
flation process.
Despite large numbers of claims that the causes
of the present era of inflation are different, that the
old laws of economics no longer seem to work, it
turns out that the recent inflation is fully in line with
historic norms. Average prices always depend on
This Issue in Brief
The increase in both inflation and insta-
bllity in the past decade is not coincidental.
It'sI conventional wisdom, says the author,
that inflation is not all bad, because it stimu-
lates employment and capital formation.
That's incorrect, Professor David Meisel-
man believes. Inflation is not a cure for un-
employment buta cause. And, he urges, the
staggering deficit of the Federal government
must be eliminated, primarily through ex-
penditure control.
The complete text of Professor Meisel-
man's paper at the Tax Foundation National
Conference will be published next month in
the Proceedings.
New York, N.Y. 10020, Judson 2-0880

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