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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.
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.
ECONOMISTS GENERALLY AGREE that gains from capital are a proper source of taxation in developing countries. This view was expressed in the Technical Assistance Conference on Comparative Fiscal Administration in Geneva in 1951 and more recently in the Santiago Conference on Fiscal Policy for Economic Growth in Latin America.1 A capital gains tax is on the appreciation of capital assets and is commonly imposed only when the increase in value is realized through sale or exchange. It should be distinguished from net wealth tax, death duties, and other capital taxes in that these are assessed on the total value of assets.