Question

Does inflation give incentive people to work less as often? and does it distort the way their income is taxed?

Answer 1

Incentive:

Answer: yes

Inflation means the rising price level. This increases commodity prices, interest, wages, and profits. More incomes are subject to higher tax slabs. Payments of tax increase. In order to lower that tax liability, people often work less.

Distortion:

Answer: yes

Real incomes of people are not considered while calculating taxes. This is a serious distortion. As the inflation prevails in the market, higher incomes are already absorbed by higher expenses and payments. Further burden of taxes should not be there; rather, incomes should be converted to real values and then tax calculation should be done.

Real income = Nominal income – Inflation