Everything is interconnected, even when it comes to aspects you never knew had anything to do with each other. One of the best examples of that is how inflation affects taxes. As a responsible citizen of your country, it is one of your duties to pay your taxes regularly. Aside from the amount deducted from your salary, there are taxes in everything that you do such as eating outside, buying your groceries, and even fees when it comes to banking and other things.
Paying taxes is a must, and you can’t avoid it. After all, it’s your duty and responsibility. However, there will always be trying times when what you earn isn’t enough anymore, especially when the cost of living continues to rise. One of the biggest culprits behind this is inflation. In this article, we’re going to talk about inflation, taxes, and everything in between. Keep reading to find out how they are connected to one another.
What is Inflation?
In a nutshell, inflation pertains to the increase in the prices of goods and services. This includes food, water, electricity, and many other things that you have to pay for as you consume them. When a country experiences inflation, the economy is also affected, including the amount deducted from taxes. But more importantly, people now have to adjust by getting less of what they can usually afford. In short, inflation means higher prices at lesser amounts and a weakened purchasing power of money.
What are the different types of Inflation?
Now that you know what inflation is, let’s move on to explain its different types. There are three types: Cost-Push Inflation, Demand-Pull Inflation, and Built-In Inflation. Cost-push inflation is the increase in prices that occurs when a product or service undergoes its production process. As a result, the finished goods will also be more expensive. Likewise, demand-pull inflation refers to the increase in money and supply due to the overwhelming demand for a specific good or service.
There is an overflow of demand, which exceeds the economy’s capacity to produce these services. The result is a demand-supply gap which causes drastic price increases. Finally, the Built-In Inflation refers to the constant expectation of consumers that prices will continue to increase as time passes. Having to pay their cost of living leads to a strong demand for higher wages, which directly affects the prices of goods and services.
With that said, let’s now talk about how inflation affects your taxes.
How Does Inflation Affect Taxes?
Here’s how it works. There will be a price increase regardless of the type of inflation taking place. Inflation increases prices, which increases a person’s taxes. Additionally, how much they earn also influences how much tax they have to pay. Tax brackets categorize people according to their salaries, assets, and businesses.
Inflation decreases the purchasing power of money, but this is not always the case. When inflation isn’t too high, taxes would stay the same. A significant inflation rate, on the other hand, causes people to spend more on their basic necessities for many reasons rather than just because it is a necessity.
Other reasons include the worries of another price increase, which will result in an influx of demand. As mentioned earlier, this will cause the economy’s production capacity to lapse, which will create demand-supply gaps among consumers. In this simple event, taxes will gradually rise to compensate for the production process, capital, and other important aspects of the economy.
Closing Thoughts
After everything that was discussed in this article, it only leads to one thing: one way or another, inflation is bound to happen and it will always affect various aspects of the country, especially the economy. This is because the economy also stands as a country’s backbone, so when it is weakened, there are drastic changes that would take place such as the increase in taxes. Simply put, the stronger and more constant an economy is, the more stable the amount of money is deducted from taxes that you have to pay.