Income Taxes and Inflation

The income tax, which has been regarded as the chief weapon in the battle against inflation, has come to be scrutinized as a possible factor in inducing inflation. Prior to World War II, the comparatively low rates of corporate and personal income taxation made such taxes appear rela tively unimportant. High rates of taxation, however, have been carried over to the postwar period and, consequently, have served to focus attention upon the effect of such taxation upon economic growth and stability, distribution of income, and the efforts made by corporations and individuals to pass along the higher rates of income tax as well as the effect that these taxes may have on savings and investment. Until fairly recently, it was generally expected that business corpo rations and the stockholders bore the burden of the corporate income tax. This absorption theory has been giving ground to the shifting theory which maintains that under present-day competitive conditions, the corporation is able to shift taxes in the form of higher prices. Empirical studies have noted an increasing tendency for businessmen to say that they take in come tax increases into consideration when setting prices. With respect to the personal income tax, there is growing reason for believing that work incentives and willingness to make risk investments are adversely affected and that efforts are made to pass along higher income taxes in the form of higher wages and salaries.