Tax distortion refers to the cost of inflation that comes from:
A) the money, time, and opportunity used to change prices to keep pace with inflation.
B) the time, money, and effort one has to spend managing cash in the face of inflation.
C) the higher taxes one must pay when earning a greater dollar amount, even though real purchasing power hasn't changed.
D) the labor costs associated with inflation.

Question

Quizplus · Accepted Answer

Tax distortion specifically refers to the additional taxes people have to pay on nominal gains (higher dollar amounts) due to inflation, even when their real purchasing power hasn't increased. This is because many tax systems are based on nominal income without adjusting for inflation, leading to higher tax liabilities without an actual increase in real income.

Tax Distortion Refers to the Cost of Inflation That Comes