The Progressive Value Added Tax (Fiscal Policy) as a Tool of Inflation Targeting: Is a Higher Inflation Target Plausible?

165 Pages Posted: 20 Jul 2016 Last revised: 21 Mar 2017

Date Written: July 7, 2016

Abstract

Premised upon taxable income the regressive Value Added Tax or Goods and Services Tax through VAT/GST Tax Returns would become progressive in nature with a CPI adjusted cost of living allowance tax credit or rebate that solves the purchasing power of income index and the Fisher Equation allows up to a 15% inflation target without the costs of inflation? It is a progressive and fair; efficient and neutral; simple; and suitable for achieving macroeconomic level objectives such as overcoming most of the costs of inflation including the relative price distortion through the price tag (by disclosing the nominal price divided by the ratio of the price index equals the real price) and acting as a buffer against deflation and a new tool of inflation targeting that can combat the Global Financial Crisis. The impetus for its adoption across the developed world notwithstanding the efficiency vs equity debate in taxation i.e. the Henry Review in Australia and the Better Tax Review is that the exchange rate depreciates making domestic goods cheaper than foreign goods thus also stimulating exports, is that once one country in the developed World adopts this economic theory every country in the developed World will be forced to consider its adoption just to remain internationally competitive. Is a higher inflation target plausible? Challenges conventional inflation target in that only monetary policy can act as a tool of inflation targeting, without the costs of inflation?

Keywords: Inflation Targeting, Financial Crisis, Inflation, Deflation, Direct Taxation, Indirect Taxation, Regressive Taxes, Progressive Taxes

JEL Classification: E31, E52, E62, F31, F41

Suggested Citation

Altamirano, Julio, The Progressive Value Added Tax (Fiscal Policy) as a Tool of Inflation Targeting: Is a Higher Inflation Target Plausible? (July 7, 2016). Available at SSRN: https://ssrn.com/abstract=2805872 or http://dx.doi.org/10.2139/ssrn.2805872

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