Inflation and Tax

Abstract

Preamble Taxation does not escape the effects of inflation. It too is distorted by the fall in value of the national currency. No problem would arise where a tax is applied to a simple base at a single rate, with no exemptions or allowances and without a significant time lag. This is however a rare case. Certainly so far as the British direct tax system is concerned there are usually multiple rates, thresholds and other allowances and, particularly in capital taxation, there may be significant gaps in time between the date of the imposition of the tax and the time when the tax becomes payable. For example the new rates of capital transfer tax announced on 26 October 1977 would apply to the estate of a person who dies in 1978, 1998 or in the next century or would do so but for the inevitable review which will be required mainly because of inflation arising between 1977 and the date of death. If this were not adjusted the heirs of the deceased would manifestly be required to pay more capital transfer tax than the Chancellor of the Exchequer in 1977 intended them to pay. A simple example will illustrate this.

Citation

Lynch, T.D. (1978), "Inflation and Tax", Management Decision, Vol. 16 No. 8, pp. 489-494. https://doi.org/10.1108/eb001176