Khiem earns $50,000 per year and pays an annual income tax of 10 percent. Due to an inflation rate of 10 percent, his pay increases to $55,000, which puts him in a higher tax bracket where he must now pay 20 percent. Khiem has experienced:

Question

Quizplus · Accepted Answer

Khiem has experienced the inflationary cost of tax distortion because his increased income has put him in a higher tax bracket, resulting in him paying a higher percentage of his income as tax. This means that he has not fully benefited from the increase in his nominal income due to inflation.

Khiem Earns $50,000 Per Year and Pays an Annual Income