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What is the effect of inflation on the tax structure of the economy?
1. Taxpayers suffer while paying there direct and indirect taxes
2. On the other hand, the government gets the benefit of inflation on the tax collection
Which of these statements is/are correct?
- a)1 Only
- b)2 Only
- c)Both 1 and 2
- d)None of them
Correct answer is option 'A'. Can you explain this answer?
Most Upvoted Answer
What is the effect of inflation on the tax structure of the economy? ...
- The extent to which tax collections of the government are concerned, inflation increases the nominal value of the gross tax revenue, while the real value of the tax collection does not compare with the current pace of inflation as there is a lag (delay) in the tax collection in all economies.
- But governments get an advantage on their interest burden, on their borrowings as inflation benefits borrowers. This benefit, however, depends upon the contemporary levels of fiscal deficit and the total national debt.
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Community Answer
What is the effect of inflation on the tax structure of the economy? ...
Inflation refers to the increase in the prices of goods and services in an economy over time. This increase in prices affects the tax structure of the economy in the following ways:
1. Taxpayers suffer while paying there direct and indirect taxes:
As the prices of goods and services increase due to inflation, the purchasing power of the taxpayers decreases. This means that taxpayers have to pay more taxes to the government but their real income remains the same or decreases. This puts a burden on the taxpayers and reduces their disposable income.
2. On the other hand, the government gets the benefit of inflation on the tax collection:
The government collects taxes in nominal terms, which means that the tax rates are fixed in nominal terms and not adjusted for inflation. When inflation occurs, the prices of goods and services increase, and the government collects more taxes in nominal terms. This means that the government benefits from inflation as it collects more taxes without increasing the tax rates.
Therefore, the correct answer is option 'A', which states that taxpayers suffer while paying their direct and indirect taxes due to inflation.
1. Taxpayers suffer while paying there direct and indirect taxes:
As the prices of goods and services increase due to inflation, the purchasing power of the taxpayers decreases. This means that taxpayers have to pay more taxes to the government but their real income remains the same or decreases. This puts a burden on the taxpayers and reduces their disposable income.
2. On the other hand, the government gets the benefit of inflation on the tax collection:
The government collects taxes in nominal terms, which means that the tax rates are fixed in nominal terms and not adjusted for inflation. When inflation occurs, the prices of goods and services increase, and the government collects more taxes in nominal terms. This means that the government benefits from inflation as it collects more taxes without increasing the tax rates.
Therefore, the correct answer is option 'A', which states that taxpayers suffer while paying their direct and indirect taxes due to inflation.
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