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Tax Distortions from Inflation: What are They? How to Deal with Them?
Author:
Sebastian Beer 0000000404811396 https://isni.org/isni/0000000404811396 International Monetary Fund

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Mr. Mark E Griffiths
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Mr. Alexander D Klemm
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Series:
IMF Working Papers
Volume/Issue:
Volume 2023: Issue 018
Language:
English
Publication Date:
27 Jan 2023
DOI:
https://doi.org/10.5089/9798400232138.001
ISBN:
9798400232138
ISSN:
1018-5941
Pages:
35
Keywords:
Tax policy; inflation; bracket creep.; expected inflation; NPV of depreciation; impact of inflation; tax distortions from inflation; savings income; cost of capital; rate of return; Depreciation; Income tax systems; Non-wage benefits; Income; Africa; Global
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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Expected inflation has few real effects in purely private economies, but this is not the case when the tax system is not neutral with respect to inflation. In practice, tax systems are not neutral—though some have attempted to be so in the past—and this paper provides a comprehensive overview of the most relevant non-neutralities drawing both on existing literature and showing new illustrations and evidence of the effects. The paper shows, for example, how taxing inflationary gains can have tremendous impact on effective tax rates—even at relatively low rates of inflation. It also shows how partial adjustment—for only some types of incomes—can create additional distortions. A new empirical analysis reveals how the erosion of the value of depreciation allowances through inflation affects investment. Finally the paper discusses policy options to address such non-neutralities.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund
Volume 2023: Issue 018