What Are the Effects on Taxes in Monetary Policy?

Monetary policy is concerned with controlling the money supply to keep the economy stable.

Monetary policy is the attempt of central banks to control the supply, availability and cost of money so that the economy is stable, primarily through stability in prices. Taxation is thus used in monetary policy to impact inflation.

Supply-Side Direct Taxes

Supply-side taxes decrease companies' profits and would be implemented to get companies to likely raise prices.

Demand-Side Direct Taxes

Demand-side taxes lower consumer disposable income, decreasing demand and are thus implemented to put a downward pressure on prices.

Indirect Taxes

These taxes, levied on sellers and typically passed on by the seller to the consumer in an effort to recoup the costs, typically always increase prices.

Tax Structure

The tax structure impacts the incentives for economic activity, such as investing in capital, helping to determine the forecasted economic growth rate and the ability to adjust to shocks in the economy.

Short-Term vs. Long-Term Impacts

Tax changes have an immediate impact and a potential "second-round effect," which may put price stability at risk in the long term. Monetary policy makers must carefully observe these later effects and respond when necessary.

References

• Speech by José Manuel González-Páramo, Member of the Executive Board of the European Central Bank

Resources

• Monetary Policy, Taxes, and the Business Cycle; Federal Reserve Bank of St. Louis