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Taxation in Times of High Inflation

October 16, 2022
World Bank J Building - Room JB1-080 | 701 18th Street, NW, Washington, DC
Tax Sunday: Taxation in Times of High Inflation

The world economy continues to be negatively impacted by the effects of multiple shocks, notably the tightening of financial conditions, the lingering effect of COVID, volatility of commodity markets, climate change, fragility and conflict, and supply chain disruptions have fueled a rise in inflation world-wide.  High inflation exerts an excessive burden on the poor with disproportionate increase in the food and energy prices, which makes up a larger share of their consumption, while their nominal income does not keep up.   

High inflation complicates revenue (as well as public spending) policies. Two distinct channels are important in tax policy design in response to high inflation:

First, inflation directly affects tax systems, because nominal features of the tax system are not automatically indexed, nominal gains are taxed, and tax payments are made with a lag. Nominal revenues certainly rise, but the timing and magnitude of real revenue changes depend on country-specific feature of tax systems. Tax systems that are fully neutral to inflation are rare. Achieving full neutrality would require major reforms, but some minor adjustments can address the greatest effects of inflation on revenue and efficiency.

Second, tax policy is one of the potential tools governments might consider using to address the high inflation impact on the poor, notably the impact of high energy and food prices. In responding through tax policy, there is a risk policy mistakes in attempts to rapidly address inflation.  The impact of high inflation is compounded by the consequences of policy measures taking in response to COVID, which included tax cuts and administrative leniency, leading to severe revenue losses in some countries. 

The upcoming Tax Conference will be held in person on October 16, 2022, from 9:00 am to 12:30 pm EDT. The attendance for this event is by invitation only. For any questions about the Tax Conference, please contact us at tax4dev@worldbank.org.

Discussion Topics

  • How have different countries have designed tax policy responses to address inflation, in particular rising food, and energy prices, in the past as well as in the present situation?
  • Policy makers are pressured by the public to reduce taxes in response to high inflation, and especially to rising food and energy prices. However, these might have unintended effects and not effectively achieve their goals. How can policy makers best deal with this policy challenge?
  • Some industries benefit from rising prices in the form of significant windfall profits. This has led some countries to introduce or consider specific taxes on such profits. How should this response be assessed; what is a good tax policy with respect to these profits?
  • What have been countries’ experience, successes, and failures in making their tax systems more neutral with respect to inflation?
  • What are the implications of the hardship caused by inflation for broader domestic revenue mobilization?
  • What surprises on the tax front should governments be prepared for during high inflation periods?

The WBF/IMF Tax Conference is a semi-annual event on international tax issues with a focus on developing countries. It takes place during the Annual and Spring Meetings. Members of country officials, staff of international organizations, business and CSO representatives and academics attend the conference every year.

 

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