> What I'm arguing is that such a loophole will only create inflation by directing the indirect tax cuts to spending.
Inflation would be caused here as the total amount of money in the country is the same. It's just that the people are spending more money and the government less money. You only get inflation when the total volume of money increases.
You can also create inflation by any number of different means. One very good way is to encourage consumer spending (not investment!) when most of what consumers are buying is manufactured in other countries then imported.
Spending can't cause inflation as there's no increase in the money supply, and so prices can't uniformly rise as there's not the actual physical cash to pay all those higher prices.
Inflation would be caused here as the total amount of money in the country is the same. It's just that the people are spending more money and the government less money. You only get inflation when the total volume of money increases.