How Can Tax Control Inflation & The Role of Fiscal Policy to Control Inflation
(Syeda Sadia Amber Jilani, Faisalabad, Pakistan)
Inflation is a situation whereby there is a continuous and persistent rise in the general price level.
As we know that Inflation = (f) Aggregate Demand. So,
*Demand-pull inflation* can be controlled through *contractionary fiscal policy* by decreasing government expenditures & increases taxes.
To control inflation, the government can increase tax rates or impose some new Taxes (such as income tax and VAT) and cut spending. This improves the government's budget situation and helps to reduce demand in the economy. As it decreases the people's purchasing power.
High income tax rates reduce disposal income. Increasing taxes on different goods and services also on the other hand, reducing govt expenditures will become the cause of reducing Purchasing power---> reducing Agregate Demand and ----> Reducing Demand pull inflation.