War inflation and taxation

Oriol Sabaté () and Sara Torregrosa-Hetland
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Oriol Sabaté: University of Barcelona

No 2024/463, UB School of Economics Working Papers from University of Barcelona School of Economics

Abstract: Warfare has been commonly associated with increasing levels of inflation, with important implications for tax systems. In this chapter, we first review the literature on war finance and inflation, considering both the fiscal causes of inflation during wartimes and the effects of inflation on tax revenues. Second, we focus on developments in the income tax during the World Wars, building upon our previous work (Torregrosa-Hetland and Sabaté, 2022). We describe the mechanisms through which inflation affected progressivity and redistribution, by reducing the real value of exemptions, brackets and deductions (“bracket creep†). This led to the incorporation of new taxpayers into the income tax system and increased significantly the tax burden of those already included. Third, we study the issue of income tax legitimacy in the face of war inflation using a novel dataset of parliamentary debates and press articles in the United Kingdom. Other episodes of bracket creep have been associated with legitimacy challenges. We use natural language processing techniques to examine whether the effects of inflation on tax progressivity were a topic of discussion in national parliaments and the press, and the extent to which MPs and journalists identified inflation as a challenge to income tax legitimacy.

Keywords: Inflation; Wars; Taxation; Text analysis (search for similar items in EconPapers)
JEL-codes: E52 E6 H20 H56 N40 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2024
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