Inflation generates an excess burden whenever
A)it is greater than zero.
B)income tax brackets are not indexed.
C)the public's shoe leather costs exceed the government's revenue gain from the inflation tax.
D)bracket creep exceeds the public's shoe leather costs.

Question

Quizplus · Accepted Answer

Excess burden of inflation arises when the public's costs of reducing their money holdings (shoe leather costs) exceed the government's revenue gain from the inflation tax. This is the case when inflation is high enough to induce people to reduce their money holdings frequently, resulting in higher transaction costs. If the revenue gain from the inflation tax is less than the shoe leather costs of reducing money holdings, then the excess burden occurs. Therefore, option C is the correct choice.

Inflation Generates an Excess Burden Whenever