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Show Utah Foundation - Inflation violates economic laws are of primary interest to those with business income or investments in business concerns. Indirectly, however, everyone is affected af-fected by these five factors, because our economy requires a continued flow of new capital investments in order to provide employment em-ployment opportunities for a growing labor force. Inflation can push up tax bills and violate traditional concepts of equity without any explicit revision of the tax laws. This was the conclusion reached by Utah Foundation, the private tax research organization in an analysis of inflation and the income tax. According to the study, the progressive structure of 3. Inflation increases the monetary value of property even if it does not rise its real value. If property is sold, capital gains taxes are applied to this increase in motley value. 4. Inflation also increases the dollar value of merchandise mer-chandise and inventories held in stock. This creates fictitious inflation earnings or "phantom profits" which are subject to taxation when the goods are sold. 5. Depreciation allowances in the tax laws are based on histroical costs " rather than actual replacement costs. This makes it difficult for businesses to accumulate sufficient reserves to replace plant, machinery, and equipment as it wears out or becomes obsolete. The Foundation study points out that the first two factors listed above affect all taxpayers; the third one applies mainly to those who report capital gains transactions; tran-sactions; while the last two state and Federal income tax laws results in tax bills that rise much faster than the rate of inflation. During periods of particularly high inflation, such as we have experienced over the past five years, the impact of these higher taxes can be very significant in reducing the standard of living for families and individuals as well as adversely affecting economic growth. The Foundation cites the example of a family with a $15,000 per year income in 1977 that had its income tied to the Consumer's Price Index. If the rate of inflation for the next five years matched that of the past five years, the income of this family inb 1982 would be $21,734, a 44.9 percent increase. in-crease. The direct taxes (Federal income tax, state income tax, and the Social Security tax) paid by this family, however, would automatically climb by 95 percent under the present tax laws. Thus, with taxes climbing faster than income, the net take-home pay (after taxes) of this family would rise by only 34 percent, which is well below the five-year inflation rate of nearly 45 percent. In other words, the effective buying power or standard of living for this family would be reduced by 7.6 percent, even though gross family income kept pace with inflation. in-flation. Foundation analysts indicate in-dicate that this decrease in purchasing power represents an "inflation tax" paid during periods of rising prices. They attribute this to the following: 1. Standard deductions and exemptions are fixed in amount; thus resulting in ' more income being subject to taxation when income , levels rise. I 2. The range of tax rate brackets also are fixed. Increases in income resulting from inflation, therefore, are pushed into I higher tax brackets and are I taxed at the highest rate to I which the taxpayer is subject. ' |