Cutting the wedge and fiscal drag, the government’s unsolved problems

Price increases are stopped by competition, defeat inflation by avoiding the price-wage spiral. The consequences of the cut in the tax wedge and the fiscal drag. No taxes on first homes but real estate income increases

While inflation hits labor incomes hard, especially low-income earners and wage earners, profits appear to be exempt. There is debate in Europe about how successful companies have been translating the rising costs of raw materials and energy into higher market prices. The story would be as follows: in 2022 there was an increase in the price of gas and many companies have managed (fortunately! otherwise they would have gone bankrupt) to transfer costs to higher prices. Now that costs have come down, prices have not been revised downwards and therefore profits have increased. Let’s say right away that for now there isn’t much evidence of this theory, especially in Italy. Shifting input prices to final prices is the only way for companies to survive, and market discipline should prevent them from exaggerating price mark-ups: after all as long as there is competition (blessed competition!) an excessive increase in prices is limited by a demand that is transferred to other producers. Even if it were true that prices have risen, it is difficult to construct an argument for a profit tax because not all companies will have been able to raise prices but only those that have managed to maintain market share while doing so.