INFLATION AND TAXATION

Inflation induces distortions in the economy, some of which are related to taxation while others would persist even if tax systems were made fully neutral with respect to rate of inflation. It is well known for instance that inflation induces individuals to hold less real cash balances and to invest relatively more in assets that maintain their purchasing power than they would in a non- inflationary world. This paper does not deal with this kind of distortion. It focuses on effects of inflation on the tax system. This paper analyzes these inflation induced tax distortions and discusses the methods that could be used to make the appropriate corrections for inflation. Section II focuses on the personal income tax; Section III treats the effects of inflation on the taxation of business income.