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Tax Distortions from Inflation: What are They? How to Deal with Them?

Author

Listed:
  • Sebastian Beer
  • Mr. Mark E Griffiths
  • Mr. Alexander D Klemm

Abstract

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.

Suggested Citation

  • Sebastian Beer & Mr. Mark E Griffiths & Mr. Alexander D Klemm, 2023. "Tax Distortions from Inflation: What are They? How to Deal with Them?," IMF Working Papers 2023/018, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2023/018
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    Cited by:

    1. Christopher Loewald & Rudi Steinbach & Jeffrey Rakgalakane, 2025. "Less risk and more reward revising South Africas inflation target," Working Papers 11079, South African Reserve Bank.
    2. Indriyana Puspitosari & Hadri Kusuma & Johan Arifin, 2026. "Macroeconomic Determinants of Tax Avoidance and the Moderating Role of Public Governance," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 1, pages 20-37.
    3. Bańkowski, Krzysztof & Checherita-Westphal, Cristina & Jesionek, Julia & Muggenthaler-Gerathewohl, Philip & Frutos, Mario Alloza & Avgousti, Aristoklis & Briodeau, Clémence & Brusbārde, Baiba & Caprio, 2023. "The effects of high inflation on public finances in the euro area," Occasional Paper Series 332, European Central Bank.
    4. Harouna Kinda & Abrams Tagem, 2024. "Natural resource revenues and double taxation treaties in developing countries: insights from a network centrality approach," Post-Print hal-04783961, HAL.
    5. Doorley, Karina & O'Shea, Richard, 2025. "Childcare subsidies, childcare costs and benefit erosion: Simulations for Ireland," Papers WP799, Economic and Social Research Institute (ESRI).
    6. Harouna Kinda & Abrams Tagem, 2025. "Natural resource revenues and double taxation treaties in developing countries: insights from a network centrality approach," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 32(4), pages 1253-1287, August.
    7. Banerjee, Joshua J., 2024. "Inflationary oil shocks, fiscal policy, and debt dynamics: New evidence from oil-importing OECD economies," Energy Economics, Elsevier, vol. 130(C).
    8. Guglielmo Maria Caporale & Silvia García Tapia & Luis Alberiko Gil-Alana, 2024. "Persistence in Tax Revenues: Evidence from Some OECD Countries," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 22(2), pages 475-491, June.
    9. Dubravko Mihaljek, 2023. "Inflation and public finances: an overview," Public Sector Economics, Institute of Public Finance, vol. 47(4), pages 413-430.
    10. Nicola Curci & Antonella Tomasi, 2026. "Fiscal drag, discretionary policy measures and the purchasing power of Italian households in 2022-2025," Questioni di Economia e Finanza (Occasional Papers) 998, Bank of Italy, Economic Research and International Relations Area.

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    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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