Indexing the tax system to take into account the effects of inflation would by itself
A)mean that only real interest earnings are taxed.
B)mean an end to taxing capital gains.
C)mean an increase in average tax rates.
D)All of the above are correct.

Question

Quizplus · Accepted Answer

Indexing the tax system to take into account the effects of inflation would mean that only real interest earnings are taxed. This is because inflation erodes the value of money over time, so it would not be fair to tax nominal interest earnings that are simply keeping up with inflation. By indexing the tax system, only the portion of interest earnings that exceed the rate of inflation would be subject to taxation. It would not necessarily mean an end to taxing capital gains or an increase in average tax rates.

Indexing the Tax System to Take into Account the Effects