Question

In inflationary situation proper policy of taxation will be _________.

• A. to avoid tax cuts
• B. increase in existing rates of taxation
• C. both (a) and (b)
• D. reduction in tax rates

Answer 1

The correct option is C both (a) and (b)

In inflationary situation, proper policy of taxation includes:

(i) Avoiding tax cuts: During inflation tax cuts are usually avoid as it increases the real income of the public which can lead to further inflation in the economy. Therefore, tax cuts and subsidies are avoided during inflation.

(ii) Increase in existing tax rates: Direct tax is increased due to which the real income of public decreases as a result of which the purchasing power falls which ultimately corrects inflation as there is no excess demand in the economy and indirect tax on luxury goods are also increased due to which the demand of these goods falls as the real income of people decreases as a result of which excess demand is balanced in the economy and inflation is corrected.