The economics of tax incidence concerns the question of who ultimately bears the burden of taxation—whether it falls on consumers, workers, or producers—and under what conditions that burden shifts between them. It is a foundational topic in public economics, tracing back to the work of early classical economists such as David Ricardo, John Stuart Mill, and later formalised within the marginalist revolution of the late nineteenth and early twentieth centuries. The key insight is that the party legally responsible for paying a tax is not necessarily the one who bears its economic cost. Rather, the incidence of a tax depends on the relative elasticities of supply and demand in the market affected.
Read MoreI have a few speaking engagements coming up, prompting me to update my view on the world beyond the borders of the Eurozone, which makes up the day job. One trend that I am looking forward to present to, and discuss with, investors and capital allocators is the tension between signs that the inflation and interest rate shocks are now fading, in a cyclical sense, and the risk that inflation will stabilise above 2%, posing a challenge for monetary policymakers. Will they channel their inner Volcker or fudge the 2% inflation target?
Read MoreThe prevailing mood in global macro discussions seems to be as follows; inflation is past its peak, but it is set to remain a lot higher for a lot longer than initially anticipated, forcing central banks to continue hiking, keep rates higher for longer, or a combination of the two. The interest rate shock in the UK, as markets have adjusted their expectations for the BOE bank rate higher, and hawkish comments from the ECB are the two most obvious cases in point in developed markets. But a surprise hike by the Bank of Canada, and a larger-than-expected hike in Norway have added to the sentiment. We only really need the Fed to be forced into a hawkish turn to complete the narrative. This shift is important for investors. We are not just trying to calibrate when central banks will pause their hiking cycles—probably soon—but we’re also increasingly discussing, and pricing, how long rates will stay elevated, and whether central banks will have to resume hiking before they cut. Higher-for-longer, or #H4L, is already a trending hashtag on FinTwitter.
Read MoreThe skirmishes in the macro wars are getting dirtier. More recently, the debate on inflation has pitted #TeamTransitory and its detractors—I’ve seen the other side described as #TeamPermanent and #TeamSustained—in a mud-slinging and, often emotionally charged, spat. I suspect that #TeamTransitory will win, eventually—whatever that means—though I also think this side of the debate has most to answer for in terms of the deteriorating debate. The rules seem to change as the consensus-beating inflation prints roll in. As I as explained here, it is unreasonable to term all versions of the world in which inflation is not making a new high on a monthly basis, as a transitory. More importantly, however, the checkmate-like rebuttal to anyone arguing that rates could and should go higher that they must be in favour of higher unemployment is particularly odd to me. The question we need to ask it seems is whether there are conditions under which policy tightening—both fiscal and monetary—to rein in demand are optimal or desirable, in an economic sense, even if it means, presumably, unemployment going up. The answer is; yes.
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