Suppose that a country has a progressive income tax code and taxable income is calculated in nominal terms, but the schedule of income tax rates is NOT indexed to inflation. An individual whose income keeps up with inflation over time will pay:
A) a lower rate of the alternative minimum tax.
B) a lower percentage of income in taxes over time.
C) the same percentage of income in taxes over time.
D) a higher percentage of income in taxes over time.

Question

Quizplus · Accepted Answer

Since the income tax rates are not indexed to inflation, the taxable income for an individual whose income keeps up with inflation over time will increase even though their real income has remained the same. This means that they will move into higher tax brackets over time and pay a higher percentage of their income in taxes. Therefore, the correct answer is D.

Suppose That a Country Has a Progressive Income Tax Code