So far, this book has focused on the relationship between price level changes and the income tax. The impact of changes in real incomes have thus been ignored. However, the interplay of the progressivity of the tax with growth in real income can have effects that a country may wish to avoid. For example, adjustments for changes due to inflation alone may still leave a country with a growing ratio of revenue from income tax to personal (or national) income which can create a fiscal drag that might hinder the growth of the economy. This chapter and the next deal with some of the issues created by growth in real income. At this point, it is perhaps worthwhile to emphasize the basic difference between growth-related and inflation-related distortions. Unlike inflation-related distortions, those due to growth result exclusively from the progressivity of the tax. There is thus no problem of capitalincome distortions. If the tax were truly proportional, no growth related problem would exist.

In this chapter, the determinants of the sensitivity of the yield of the personal income tax will first be analyzed. Then a method for measuring that sensitivity will be described and applied to United States data.

The analysis of the sensitivity of the individual income tax to changes in national income has been a subject that for many years has attracted considerable attention. For a time, this attention was directed toward the contribution that this sensitivity made to stabilization.