Anti-Inflationary Tax Policy:
An anti-inflationary tax policy must be directed to remove the inflationary gap. Therefore, during inflation, not only should the existing tax structure be retained, but also new taxes be levied to wipe off the surplus purchasing power and reduce consumption demand. But the tax rates should not be raised so high which may adversely affect new investment and generate recessionary conditions. The burden of taxation may be increased to the extent which may not retard new investment. Expenditure tax and excise duties are anti-inflationary in character. Besides, steeply progressive personal income taxation and taxation on windfalls can also be highly effective to curb abnormal inflationary pressures. Exports should be restricted and imports of essential commodities should be encouraged. Thus, export duties may be increased on monopoly items, and import duties on essential commodities and scarce commodities may be reduced. The increased inflow of supplies from foreign countries will have a moderating impact upon prices. The tax structure should be such, which may impose a heavy burden on high-income groups and a light burden on middle and low-income groups. It means taxing the high-income groups at high rates while taxing the low-income groups at low rates.
It is now concluded that government tax policies must be devised with careful attention to the need for stability and growth. Badly devised tax policies can throw the economy into violent fluctuations and seriously impede economic growth.
As a general proposition, it can be said that during inflation, tax increases should be considered. If it appears that price increases are due to an abnormally high level of consumption, an increase in excise taxes may be suggested. If alternatively, price increases are due to excessive investment expenditures, consideration can be given to an increase in taxes which probably may have more effect upon investment, for example, an increase in higher brackets of personal income tax. When the economy gives an indication of a condition of under-employment, taxes that impede consumption such as the excise taxes, may be lowered, and those which discourage investment may be dropped.