Income Distribution and Taxes in an Inflationary Context

Abstract

The conventional theory of tax incidence is based on the marginal productivity theory of distribution and perfect competition. While some attention has been devoted to incorporating dynamic and non-competitive elements into the theory, most of the recent literature examines the question within the context of a static general equilibrium model (see the survey by Mieszkowski, 1969). In this paper we analyse the effects of taxes on income distribution in an inflationary context. It is often argued that some of the most serious consequences of inflation are its effects on income distribution, and hence it is of interest to examine the question of tax incidence via the inflationary process. This is done by constructing an aggregate model of the wage-price sector in which both wages and prices are determined partly by competitive demand elements and partly by non-competitive cost considerations. Three types of tax are considered, namely a personal income tax, a corporate profit tax and a sales tax. In view of the fact that people do not necessarily try, or are not necessarily able, to pass on their entire tax burdens, we specify the proportions of the various taxes they attempt to pass on as free parameters, which we allow to vary among the different taxes. By looking at distributional questions in this way, we are departing somewhat from the traditional framework, which neverthless could emerge as a polar case.