Taxation and the distributional impact of inflation: The US post-war experience*

Due to a lack of adequate before and after tax time series, the impact of inflation on the income distribution in the presence of a progressive tax system is widely unexplored. Contributions using U.S. data have not reached a consensus about income inequality decreasing, increasing or showing no significant association with inflation. Our study analyzes the relationship across the distribution. We use a recently available dataset on U.S. income before and after taxation on a quintile-by-quintile basis for 1962-2016. We find inflation (i) before taxes to, if any, slightly decrease inequality, (ii) to amplify tax progressivity, and (iii) after taxes to reduce the Gini coefficient by 0.4 of a standard deviation in response to a one percentage point inflationary shock. We attribute (i) to the creditor-debtor channel. Findings (ii) and (iii) indicate missing or incomplete indexation redistributing particularly from the fourth quintile to the two bottom quintiles.