CAN INCOME TAX INCREASES BE INFLATIONARY? AN EXPOSITORY NOTE

Publisher Website
Google Scholar
Abstract
Conventional macroeconomics classifies an increase in the rate of income taxation as an anti-inflation device because it reduces aggregate demand. However, an income tax hike may also constrict aggregate supply, making the effect on the price level ambiguous on purely theoretical grounds. This phenomena is investigated in the context of the conventional Hicks-Hansen IS-LM model, and a sufficient condition for an income tax hike to reduce the equilibrium price level is found. It is argued that this condition is very likely to be satisfied by the U.S. economy.

This publication has 2 references indexed in Scilit: