Inflation, indexation and interest income taxation

Abstract

The work looks at the various efforts being made to make tax systems inflation-proof, from both a theoretical and practical standpoint. As to the latter, the author examines the taxation of interest income in an inflationary situation and makes some recommendations aimed at reducing, if not eliminating, inequities that arise. As to the former, the author generalises the theoretical conclusions of Fisher’s theory by explicitly introducing income taxation among the variables that affect the Fisherian conclusion. The basic policy issue raised is that the Canadian solution does very little to solve the problems related to the taxation of capital gains and interest incomes in an inflationary situation. JEL: E31, H24

Keywords

• Tax system
• inflation
• interest income
• Fisher’s theory
• taxation
• Canada