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George E. Lent

Financial statements based on historical costs increasingly depart from current values during an inflationary period and have distorting effects on the measurement of business profits. For this reason, periods of rapid inflation, especially following a major war or economic crisis, have been met in some countries by measures for the revaluation of business accounts for purposes of reports to shareholders and the determination of taxable income.


This paper is a study of fiscal incentives for household saving. Section I discusses the rationale for and the general features of such incentives, and considers some of the problems that arise in their operation. A detailed consideration of different types of incentive, as applied in various countries, follows in Section II. Section III examines in depth the experience with these types of incentive in three countries—France, the Federal Republic of Germany, and Japan. Section IV contains some concluding remarks.

International Monetary Fund. External Relations Dept.

The Web edition of the IMF Survey is updated several times a week, and contains a wealth of articles about topical policy and economic issues in the news. Access the latest IMF research, read interviews, and listen to podcasts given by top IMF economists on important issues in the global economy.

Mr. Vito Tanzi

Inflation affects individuals and income classes in many ways—as consumers, taxpayers, wage earners, savers, asset holders, lenders, borrowers, and so forth. Because of this multiplicity of influences, it is difficult, and perhaps impossible, to assess the total economic impact of inflation. For this reason, empirical studies have limited themselves to analyzing the impact of inflation on individuals or income classes in their roles as consumers, savers, or wage earners. This partial approach does not answer the question of whether the total impact of inflation is or is not beneficial to individuals in particular income classes, but it does provide interesting information that can be useful for policy purposes. This paper will follow this partial approach and analyze the impact of inflation on individuals in connection with the tax treatment of interest paid or received in the United States.

Mr. Vito Tanzi

The literature dealing with the impact of inflation on taxation is so extensive that it may suggest that it would be difficult to write anything novel on this subject. Yet a close perusal of this literature shows that it has been biased by the recent experiences of the industrialized countries. For these countries, inflation has generally been associated with increases in the real value of tax revenues, so that many authors have been led to believe that the main inflation-induced problems are the prevention of this supposedly unwanted, or at least unlegislated, increase in revenue and the neutralization of the inevitable effects on the redistribution of the tax burden among income groups. The increase in real revenue is likely to occur mainly when (a) the lags in the collection of taxes are short, and (b) the tax systems are elastic. However, while these conditions seem to characterize many industrialized countries, they are not common to all countries.

Efraim Sadka

When the effect of high inflation on the tax system is taken into account, the overall revenues from inflationary finance may well be negative. The strength of this contention is weighed against measures taken in Israel in an attempt to construct an inflation-proof tax system. The paper concludes that, despite these measures, the Israeli experience suggests that it is more appropriate to talk about the “inflation subsidy,” rather than the “inflation tax.”

Nicholas Stern

What types of goods should be taxed? How progressive should the income tax be? What should be the balance between the taxation of commodities and the taxation of income? These questions are obviously central to public finance, and they have concerned many leading economists of the last two centuries, from Smith, Mill, Dupuit, Edgeworth, and Wicksell to Pigou and Ramsey. The past 15 years, however, has seen a tremendous surge in the formal analysis of the problems posed by these questions. This paper gives an introduction to this recent literature. Although much of the literature is technical, this paper aims to present a broad understanding of the methods of approach, the type of arguments used, and the main conclusions reached. Given the precise nature of the problems and the sensitivity of many of the results to particular assumptions, it is not entirely possible to avoid formal details. The paper therefore attempts to identify some fairly general and robust lessons.

International Monetary Fund. External Relations Dept.

At the start of 2001, Russia lowered personal income tax rates dramatically by establishing a single rate of 13 percent. Tax revenues from personal income tax soared that year, leading advocates of the reform to claim that the tax cuts had more than paid for themselves. But was it the cut in tax rates that caused the increase in tax revenues? Prakash Loungani of the IMF Survey interviewed Michael Keen and Anna Ivanova of the IMF, who have just coauthored with Alexander Klemm one of the first studies to answer that question.

Mr. Vito Tanzi

The sensitivity (i.e., elasticity and built-in flexibility) of the U. S. individual income tax to changes in national income is of great interest to researchers and policymakers. However, the direct measurement of this sensitivity—that is, the measurement obtained from time-series observations of the relevant variables—has always been difficult, and even at times impossible, because changes in the legal structure of the tax have been too frequent to provide enough observations that relate to the same legal structure to allow statistically significant coefficients to be determined. This was particularly true in the United States before 1954, when the rates were changed frequently; it has also been true since 1963, when important changes occurred in rates, personal exemptions, deductions, and other features. In contrast, during the period between 1954 and 1963, hardly any significant statutory changes occurred in the tax.