President-elect Obama is promising to raise taxes on the rich in order to put money into the pockets of the middle class. Now, I am considered lower middle class (according to my income). I purchase different things than "the rich" do; "the rich" don't buy used cars and microwave burritos and I don't buy yachts and mansions. So if the government forcibly removes a percentage of "the rich's" income, then less money is available for purchasing yachts, mansions, caviar, and foie gras. Lessened demand means layoffs for people who work in those industries.
Meanwhile, government distribution of the confiscated lucre to myself and others of my socio-economic level has not magically increased the amount of goods and services (like microwave burritos) that WE tend to purchase. So logically, we now have more dollars chasing the same amount of goods; the result? Higher prices for the things I purchase.
Inflation--that is, increasing prices--is best explained as increasing quantities of dollars relative to goods and services being produced. There are two primary ways that inflation is effected: One is simply the government (or whoever controls the money supply) printing more money. The other is decreasing amounts of productivity. Now, from what Obama has done already in voting for the recent "Bailout", we know he has no compunction about printing up more dollars (and for an example of how this type of inflation hurts the economy, see my post detailing "The Pizza Flavored Soda Company"). But in addition, the tax plan he lays out--involving increased taxes on the rich, a group which consists primarily of producers--shows he doesn't understand or care that his plan will hurt productivity. On a marginal basis, as the tax rate on the next dollar earned is increased, the incentive for the rich to earn that dollar is diminished, until he reaches the point where he stops producing.
An example:
Say there is a crackerjack furniture maker; we'll call him "Joe the Carpenter". He has saved up a lot of supplies, tools, and materials for making chairs, his specialty. So, when he makes a chair, he simply pulls out all the equipment he needs, and makes the chair--he doesn't need to purchase more wood, say, for the rest of his life. So, Joe can make one chair each hour, for which he charges $100. If he wants to make $400 on a certain day, then he spends four hours making four chairs. Joe likes to make money about as much as he likes making chairs, so he spends 10 hours a day making chairs; he earns a total income of $1000 each day. Now, suppose that a bunch of people in the city government think that it's unfair for Joe to make $1000 a day when so many people can't make even $100 a day. So they pass a graduated, progressive tax on chairmaking. For each chair he makes and sells, Joe must pay an extra 10%. So if he builds and sells 1 chair, he sells it for $100, pays $10 in tax, and keeps $90. If he builds a second chair, he can sell it for $100, pay $20 in tax, and keep $80. The third chair brings a tax of $30, leaving him $70 from the sale, on up to the point where, if he makes a tenth chair, his tax is 100%, or the full $100 for which he sells the chair. Do you supposed that Joe will make that 10th chair, since he derives no income from doing so? Does he make the ninth chair? Or even the eighth? Would you?
The point is that higher marginal rates on income tend to hurt productivity among groups hit by those rates, which means less "stuff" for the rest of us. Which means higher prices for the "stuff" that is produced. Which means inflation.
Update: Well, it doesn't mean "inflation" per se. Inflation, in my opinion, is a monetary phenomenon. We would, I think, see a rise in prices of some products while the prices of other products fell. For example, Joe limits his productivity to whatever profit margin he values over the leisure time that he could have by not making chairs. Say that Joe is fine with a 50% tax on his earnings. That means that once he makes five chairs he stops working and goes back home to watch TV. Now the community is poorer 5 chairs that it might have had. A lower supply of chairs without a corresponding lowering of demand for chairs means that Joe can increase the price of his chairs. But if Joe's profits for making and selling chairs is high enough, then others will enter the chairmaking business. You then have an increase in the number of chairs, but at the expense of other products that were previously being made. Sam the Ice Cream man is now making chairs, for example, so the community has more chairs but less ice cream. The price of ice cream rises while the price of chairs falls. It makes more sense to allow the incentive of profits to work for Joe, who is more than willing to make the number of chairs needed by the community, if he is receiving what he considers fair compensation.