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Inflation and the Tax System in Canada: An Exploratory Partial-Equilibrium Analysis

  • Brian O'Reilly
  • Mylène Levac
Registered author(s):

    This paper reports on an exploratory application to Canadian data of an approach pioneered by Martin Feldstein (1997, 1999). Feldstein finds that even at low inflation rates there are costs arising from the distortions introduced by the interaction of inflation with the taxation of income from capital (capital gains, dividends, and interest) in a less-than-perfectly-indexed tax system. Given the exploratory nature of our work, only the main aspects of the conceptual basis of this approach are sketched, and very rough-and-ready estimates for inputs and outputs reported. The economically significant welfare costs of inflation obtained when this approach is applied to Canada arise mainly from distortions in the timing of consumption and saving. However, our reservations about the approach have not led us to refine the estimates or to indicate a preferred estimate.

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    File URL: http://www.bankofcanada.ca/wp-content/uploads/2010/01/wp00-18.pdf
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    Paper provided by Bank of Canada in its series Staff Working Papers with number 00-18.

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    Length: 46 pages
    Date of creation: 2000
    Date of revision:
    Handle: RePEc:bca:bocawp:00-18
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    Web page: http://www.bank-banque-canada.ca/

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    1. Mervyn A. King & Don Fullerton, 1984. "Introduction to "The Taxation of Income from Capital: A Comparative Study of the United States, the United Kingdom, Sweden, and Germany"," NBER Chapters, in: The Taxation of Income from Capital: A Comparative Study of the United States, the United Kingdom, Sweden, and Germany, pages 1-6 National Bureau of Economic Research, Inc.
    2. Robin Boadway & Neil Bruce & Jack Mintz, 1984. "Taxation, Inflation, and the Effective Marginal Tax Rate on Capital in Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 17(1), pages 62-79, February.
    3. Charles Ka-Yui Leung & Guang-Jia Zhang, 2000. "Inflation and Capital Gains Taxes in a Small Open Economy," Departmental Working Papers _119, Chinese University of Hong Kong, Department of Economics.
    4. Leo Bonato, 1998. "Price stability: some costs and benefits in New Zealand," Reserve Bank of New Zealand Discussion Paper Series G98/10, Reserve Bank of New Zealand.
    5. Hasan Bakhshi & Andrew Haldane & Neal Hatch, 1999. "Some Costs and Benefits of Price Stability in the United Kingdom," NBER Chapters, in: The Costs and Benefits of Price Stability, pages 133-198 National Bureau of Economic Research, Inc.
    6. Mervyn A. King & Don Fullerton, 1984. "The Taxation of Income from Capital: A Comparative Study of the United States, the United Kingdom, Sweden, and Germany," NBER Books, National Bureau of Economic Research, Inc, number king84-1, 07.
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