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As Americans Feel Effects of Inflation, Financial Analysts Warn Raising Taxes Will Slow Down Economy

In this July 14, 2021 file photo, pedestrians pass the Macy's store in the Downtown Crossing shopping area, in Boston. (AP Photo/Charles Krupa, File)

New inflation numbers show the average American is feeling the effects of sky-high prices sparked by increased demand for goods and services. 

The Biden administration is working to bring costs down, putting faith in a system that would heavily tax the rich. But financial scholars are warning about the move as the President pushes the $3.5 trillion infrastructure bill as a part of his Build Back Better Agenda. 

"By looking to raise taxes on the highest income earners will slow down economic activity because the high-income earners are the ones who put capital into the economy," said Michael Busler, professor of finance at Stockton University. 

"If you have inflation and a stagnant economy, you'll end up with what we had in the 1970s, a stagflation problem. That's my biggest fear," he said. 

Inflation at the wholesale level climbed more than 8 percent last month, year-to-year, the largest gain in a decade. Meat, fish, poultry, and eggs are up 6 percent; and up 15 percent since the beginning of the pandemic. 

"We're either going to run out of stuff or pay more for it unless something changes," said Ted Rossman, senior analyst at Bankrate.com. "Grocery inflation is up about 3 percent over the past year, where restaurant sales are up about 4.7 percent."

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There's also a packaging problem. Aluminum hit its highest price in 10 years, and cardboard hit an all-time high in February. As food distributors pay higher prices, Americans will feel the impact in their wallets. 

Rossman did say there is some good news. Credit card debt is down 15 percent over 2019. In addition, both low unemployment and interest rates show promise for an economy trying to stand on its feet. 

But what's the reason for the increase?

"There's big back-ups at the ports. There's quarantines and not enough workers," Rossman explained as part of the problem. 

The Bankrate.com analyst said we can gauge inflation by looking at shortages; bare shelves at the store, a lack of inventory in homes and automobiles. He believes the next major pain point will be this holiday season when supply chain disruptions come to a head. A lot of people will be shopping early, and stores might have trouble stocking and restocking inventory.

"I've heard about shrinkflation where the cost stays the same, but the packaging has gotten smaller," Rossman said. "That's something these consumer products are doing to compensate."

Busler said workers refusing to go back to work, bottlenecked exports, and supply chain disruptions are only part of the problem. He's warning the public that government spending is the source of our economic woes.

"In the last two years, the federal government spent more than $6 trillion more than they have taken in tax revenue,"  he said. "That's all pure excess demand. The Federal Reserve is maintaining a very expansive monetary policy and increased the money supply by about 20 percent in the last year, and that is inflationary. They've also kept interest rates at near-zero levels."

Busler said the 'light at the end of the tunnel' is dim. His hope for the economy rests on reducing the rate of supplemental money while providing opportunities for American workers. 

On Thursday, President Biden promised the economy would return to normal under his proposed agenda while spending another $3.5 trillion to strengthen America's infrastructure.

"Big corporations and the super-wealthy need to start paying their fair share of taxes," the President said. "It's long overdue. I'm not here to punish anyone, I'm a capitalist." 

It's an agenda Busler believes will create even more problems for the economy. 

"Once you start getting inflation, particularly with the wage inflation that tends to be permanent in the economy, and there's a wage-price spiral," he noted.

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