Abstract
Inflation, when combined with progressive income taxation, increases total real tax burdens and changes their distribution across income classes. Theoretically, a proper indexation for inflation of the tax system can eliminate these effects. California recently became the first state in the country to institute an automatic indexation mechanism in its income tax code. However, this measure is partial in nature; it only minimizes the effects of inflation but does not eliminate them. This paper analyzes the consequences of this inflation adjustment for effective tax rates and changes in the distribution of relative tax burdens. The California measure needs to be significantly modified and extended before it can be expected to cope fully with these inflationary impacts.
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