How would large increases in taxes affect price inflation?

Question

reason for asking. The US's financial situation is dire. It is certain that taxes will increase dramatically in the next 10 years. Currently inflation is rising and will continue to rise as a result of the dollar's continuing decline in value which will continue as a result of the aforementioned dire financial situation the country is in.

Assuming these impending higher taxes arrive how will that affect price inflation? People will spend less if taxes are higher so I imagine higher taxes would be defationary. Any insights out there?

Answer 1

T=tY

PT=PtY

Using the Quantitative Theory of Money

PY=MV

and making velocity a constant

V=Kte=µ

PT=MVt=µMt

Operating

dPT+dTP=µ(dMt+dtM)

This expression /P

dPT/P + dTP/P=µ(dMt/P +dtM/P)

dP/P=Inflation=&

&+dT=µ(dMt/P+dtM/P)

&=µ/P(dMt+dtM)-dT

Inflation according to this equation depends on how much the monetary mass and the rate of the taxes grow. The level of prices P in the first period of time is also considered. If P is high enough when taxes are increased, the inflation will not be important. If P is low when taxes are increased, a high inflation will be expected. But what is curious is that dT, the total tax collected by the Government is a hinder or an obstacle to new and higher taxes as it´s negative.

As for spending less, Governments always consider the Laffer effect when they increase taxes.