If income tax rates are based on nominal income, as inflation increases, taxpayers will see:
A) an increase in their real incomes.
B) their taxes fall as their incomes fall.
C) their taxes rise even though their real incomes are falling.
D) an increase in the nominal income.
E) their taxes fall even though their real incomes are rising.

Question

Quizplus · Accepted Answer

If income tax rates are based on nominal income, as inflation increases, taxpayers may see an increase in nominal income due to inflation, but their real incomes may not increase at the same rate. However, their taxes will be based on their nominal income, so they will have to pay higher taxes even though their real incomes are not increasing at the same rate as inflation.

If Income Tax Rates Are Based on Nominal Income, as Inflation