Income Tax Indexation in an Open Economy

Jukka Lassila

Journal of Money, Credit and Banking, 1995, vol. 27, issue 2, 389-403

Abstract: Indexation of progressive income taxes provides a way of cushioning against various shocks. It is both an alternative and a complement to wage indexation, but as a policy instrument it is much more ambiguous. James M. Holmes and David J. Smyth (1972) have shown that if money demand depends on disposable income, tax cuts may be contractionary. The author shows that this may change the results of Neil Bruce (1981) concerning tax indexation completely. Progressive taxation also complicates Joshua Aizenman's (1985) findings concerning wage indexation. An increase in openness, for instance, does not necessarily increase the optimal degree of wage indexation. Copyright 1995 by Ohio State University Press.

Date: 1995
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