Inflation greatly distorts the tax system not only relating to direct taxes such as income-tax, wealth tax, gift tax, estate duty, etc., but other taxes as well. First, there is distortion in the traditional measures of the tax base, that is, the income or wealth concepts to which the tax rates are applied. Second, inflation constantly changes the real effect of the tax rate structure. The basic exemptions, the standard deductions, the composition of tax brackets and many other features of the tax structure are specified in monetary terms. If the law does not counteract the inflationary effects, the basis and the limits fixed get continuously eroded in terms of real purchasing power. As a result, as the income rises, the higher income gets pushed into higher tax-brackets even though the rise in income does not keep pace with inflation. The Mathews Commission set up by the Australian Government years back, to study the relationship between inflation and taxation , observed thus: “Whether the rate of inflation passes a critical level, its effect on the taxation system change in kind as well as degree and it becomes difficult for the economic system to adapt in conventional ways.
IS INFLATION-ADJUSTED TAX SYSTEM FEASIBLE?
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