Disinflation and taxation: The case of Israel

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Abstract

Israel's experience indicates that high inflation places an asymmetrically heavy burden on workers, relative to employers and the self-employed. The mechanisms by which this unequally distributed burden is created are through the tax system and exchangerate policy which altered the relative prices of low labour-intensive tradable goods versus high labour-intensive non-tradable goods. We have shown that the interaction between inflation and taxation resulted in a low tax burden on the business sector and relatively high burden on wage earners. (This 'inflation tax' on wage earners does not stem from the traditional depreciation of money balances or the so-called Tanzi effect.) Indeed, the stabilization programme tilted the functional distribution of income in favour of labour.

Original languageEnglish
Pages (from-to)37-46
Number of pages10
JournalInternational Journal of Finance and Economics
Volume1
Issue number1
DOIs
StatePublished - 1996

Keywords

  • Capital income tax
  • Income distribution
  • Inflation
  • Labour income tax

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