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DEVELOPMENT POLICY has, until recently, been concerned primarily with stimulating economic growth. In light of the widely accepted view that economic growth was a precondition for a more equal distribution of income, little attention was given to the highly unequal income distribution that prevails in the less developed countries. These inequalities, however, are becoming less and less acceptable politically. Concern with the income distributional aspects of development policies has thus acquired new respectability. As Mr. Robert McNamara, President of the World Bank Group, stated at the Annual Meeting of the International Monetary Fund and the International Bank for Reconstruction and Development in 1972: “When the highly privileged are few and the desperately poor are many—and when the gap between them is worsening rather than improving—it is only a question of time before a decisive choice must be made between the political costs of reform and the political risks of rebellion” (McNamara, 1972, p. 26).1 He added that “shifts in the patterns of public expenditure represent one of the most effective techniques a government possesses to improve the conditions of the poor…. Governments can best begin … by initiating surveys on the effects of their current patterns of disbursement…. The Bank will assist in such surveys and, based on them, will help design programs, to be financed by it and others, which will improve the distribution of public services” (McNamara, 1972, p. 28).

International Monetary Fund. External Relations Dept.

Over the years, African policymakers have become knowledgeable about the reforms needed to promote investment, but they continue to have difficulty implementing them. A high-level seminar, organized by the IMF Institute under the auspices of the Joint Africa Institute in Tunis, Tunisia, and held on February 28–March 1, looked at how some of the main obstacles to investment—infrastructure, tax systems, access to finance, and governance—were hindering the implementation of reforms.

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.”

Mr. Vito Tanzi

It has often been argued that many developing countries, in their pursuit of growth through capital accumulation, may have no choice but to run fiscal deficits in order to finance their development expenditures. The reasons given are: (a) that their tax bases are inadequate to allow a high tax burden; (b) that even when adequate tax bases are available, the countries’ tax administrations are too inefficient to take advantage of them; or (c) that, in any case, the political realities are such that high tax burdens are not possible.1 In the absence of developed capital markets or external borrowing, these fiscal deficits are often financed wholly or partly by central banks (i.e., through money creation). This printing of money brings about increases in the general price level and thus reduces the real value of the monetary unit. This reduction can be seen, as Friedman and Bailey showed many years ago, as a kind of tax on those who are holding money.2

Evans Owen and LLoyd Kenward

On september 27, 1986, the U.S. Congress passed the Tax Reform Act, and on October 22 the President signed the Act into law. The Tax Reform Act of 1986 (TRA) made sweeping changes in the structure of the U.S. tax system, by curbing tax preferences and by using the room thus created to lower marginal tax rates. In this way, it was hoped, incentives to work, save, and invest would he enhanced, and economic performance would be improved. In addition, the elimination of many tax preferences was expected to help equalize the tax treatment of different investments, thus raising the efficiency of investment. The TRA was designed to be neutral in its overall effect on revenue over the period 1987-91, but it would significantly alter the distribution of the tax burden: the tax burden on corporations would increase by US$120 billion over the five-year period, whereas the personal tax burden would decline correspondingly. Receipts were increased substantially in fiscal year 1987 but are expected to be lower than otherwise in fiscal years 1989-91.


When there are collection lags in the tax system, inflation reduces real revenues. This is often offered as an argument for less reliance on the inflation tax. But the optimal rates of other taxes should also be reconsidered in the light of collection lags. When this is done, the focus shifts from the revenues (which can be recouped by changing the rates of these taxes) to the associated costs of collection. In a benchmark case where the average costs of collection are constant, the optimal inflation tax is independent of the collection lag.[JEL E51, E62, H21]

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.