This book has analyzed in some detail the effects of inflation on the personal income tax and, to a lesser extent, the effects of inflationinduced increases in personal income taxation on the rate of inflation. It has also discussed various adjustment mechanisms aimed at neutralizing those effects, as well as their use in various countries. The purpose of this chapter is not to summarize the arguments presented in the previous chapters but to draw a few basic conclusions. These will be organized around three sections dealing respectively with political and stabilization, equity and efficiency, and administrative aspects. Particular issues may, of course, involve more than one of these aspects.

Political and stabilization aspects

The basic political argument related to the indexation of income taxes concerns the “proper size of the public sector” and thus has divided liberals from more conservative writers. As we saw in earlier chapters, in the absence of indexation and of substantial lags in collection, an increase in nominal income – whether due to inflation or growth – will increase the ratio of tax revenue to national income. Governments will have more money to spend without having to raise taxes. As a consequence the public sector is likely to be, or become, larger when no indexation is present. An individual's attitude toward this expansion is likely to depend on his political views. Liberals are likely to favor it while conservatives are likely to oppose it.