The Coming(?) Inflation and the Income Tax: Lessons from the Past, Lessons for the Future

Abstract

The concerns about inflation as a result of the current financial crisis and the U.S. budget deficit challenge the social order, including taxation. Based on the historical U.S. experience and discourse on this issue, the article focuses on the relationships between adjusting the tax system for inflation and the general attitude towards adjustment for inflation in the social order. The article offers a new insight which is very different from the current research. The nominalism/adjustism culture that dominates the social order is placed at the center of the analysis. There is “equilibrium” between the scope of adjustment in the social order and in the tax regime. Advancing adjustment of the tax regime requires that it also be promoted in the general social order. This cultural paradigm plays a significant role in the tax response to inflation, including the scope and character of that adjustment regime. This approach erodes the literature’s conservative approach arguing that classical tax policy consideration like cost-benefit analysis is the most effective factor on the adjustment issue. The article argues that adopting an adjusted tax regime is largely dependent on the existence and extent of a general culture towards the concept of “money”: Is the prevailing culture one of nominalism or adjustism?This paradigm explains the reality in the U.S. in the past with regards to adjustment for inflation. The sophisticated American discourse on adjusting the income tax regime for inflation, which first took place in the late nineteen seventies and early nineteen eighties, was unproductive from the start, and was doomed to failure because the U.S. culture of adjustism was not sufficiently ripe for justifying or permitting a “legitimate” social decision on adjusting the tax regime. The lessons from the past are that advancing adjustment of the tax regime requires promoting adjustment of the general social order. Adjusting the income tax regime without adjusting the general social order would be, culturally, a tough mission and even impossible.