The efficiency of nominal and real tax systems

Abstract

This paper analyses the interaction of inflation with nominal and real tax systems by incorporating each of a real tax system (which taxes only real asset returns) and a nominal tax system (which also taxes the inflation component) into the consumption capital asset pricing model. Abstracting from administrative costs, it is shown that a real tax system generally leads to a lesser distortion of consumption patterns and of asset returns than does a nominal tax system, even in an environment with zero expected inflation.