But are taxes really deflationary? Seems to me we've had periods of high tax rates and also high inflation. For example, in the 1970s income and capital gains tax rates were very high and yet, with the oil price shocks of the decade, we also had very high inflation.
Compare:
http://www.ctj.org/pdf/regcg.pdf - table of historical US tax rates
http://proft.50megs.com/inflation.html - chart of historical US inflation
I'm watching what companies do when confronted by high energy prices. Many of the companies I cover are raising prices wherever they can, with more urgency than I've seen in years, and the primary motivation is that rising oil (and commodity) prices are increasing their cost of goods. They've been doing everything they can to cut other costs - moving production offshore, freezing pension contributions, streamlining distribution networks, holding the line on wages, etc. But many of them are finding it harder to preserve their margins through those measures, so now they are raising prices. For example, packaged food companies are doing this as fast as they can.
Edit: I found and added the inflation chart above. I can't see any particular relationship between higher (lower) taxes and lower (higher) inflation. I realize the
theory is that high taxes lead to lower demand and thus lower prices. I'd like to see the
data that actually supports either theory (that taxes are deflationary, or that oil acts like a tax).