Taxation and Inflation

Abstract

It is adequacy of taxation in the quantitative sense and in relation to public expenditure that is the most important aspect of taxation for inflation control. A well- developed public economy financed by a progressive tax sys tem supplies a powerful automatic check on fluctuations in the private economy. A less progressive tax system would have some advantage in its reduced impingement on savings and in centives, but the advantage would not be large nor important enough to offset considerations of equity which must be weighed in the balance. As to state and local taxes, the federal gov ernment could do more to protect the states from interterri torial competition—income tax credit—and it could provide a more flexible support for state public works than tax-exempt securities. Several tax gadgets for inflation control are re viewed but none appear to be politically or otherwise promising at present. Nevertheless it must be recognized that oligo polistic practices in industry are a major factor in the present inflation problem. Fiscal policy, including its tax element, is important for counterinflationary purposes, but it encounters powerful vested interests, and it should not be our sole reliance in a stabilization program.