Answer to Question #85358 in Macroeconomics for Yonela

Question

4.1 A classmate of yours tells you that, the combination of inflation and a progressive income tax system tend to redistribute income in the economy.
Explain why this is true.

Answer 1

Under the conditions of actual inequality of incomes of economic entities, progressive tax system withdraws most of the high incomes and a smaller part of the low incomes and contributes to a certain leveling of the property status of economic subjects. In addition, in the conditions of economic growth and income growth, progressive taxation contributes to the growth of tax revenues to the budget.

The redistribution of income caused by inflation is carried out in several directions.

• People who receive fixed incomes losses because constant nominal incomes persist in terms of inflation, real income decreases.

• People receiving indexed income are protected from inflation as much as the increase in their income corresponds to the general price increase in the country.

• Inflation can contribute to an increase in the real incomes of those engaged in the production and sale of goods, the rise in prices of which is ahead of the increase in the general price level.

• The most protected from inflation are the owners of real estate, jewels, etc., since the rise in prices for these types of wealth, as a rule, is not inferior to the rate of inflation, and sometimes even exceeds them.

• If the interest rate is fixed, lenders lose their income and borrowers win.