The common view I work off when stating that tax cuts increase inflationary pressure is that tax cuts increase “aggregate demand“, which in turn will lead upward pressure on prices, and therefore an upward shift in interest rates.But why does aggregate demand increase? Why does demand change if I spend a dollar rather than the government spending that dollar?
I guess that the argument is that with a tax cut I get to spend an extra dollar but the government doesn't reduce its spending by a dollar. So the real issue isn't aggregate demand but rather how does the government fund its dollar of spending now that it has given me my dollar back. It can either increase debt by a dollar, but in so far as the world is Ricardian I would see the dollar of extra debt as future tax and thus save my tax cut to pay for the extra tax in the future, or it can expand the money supply but we have an independent central bank so the government shouldn't be able to do this. So why does a tax cut generate inflation?