| Abstract: | We derive a measure of the bracket-creep-induced inflation tax based on an income-compensation function that recognizes that consumers substitute among deductible and nondeductible goods as the incentives to consume the goods change over time. The measure of the inflation tax is decomposed into a convenient function of marginal tax rates and the change in expenditures on tax deductible goods relative to nondeductible goods that are required to maintain a fixed level of utility. Tentative estimates suggest that the inflation tax as a percentage of constant utility income during the 1970s averaged about 1 percent per year. |
