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Purpose of adjustment

14.44. It is sometimes argued that the rate schedule should be adjusted for the effects not only of inflation but also of increasing real incomes, implying that once an income tax structure has been established the burden of tax should remain constant over time at each point on the income scale. The radical implications of such a policy may be brought home forcibly by pointing out that the average rate of income tax for the taxpayer with an income equivalent to average weekly earnings would have remained approximately 5 per cent, taking 1954–55 as the starting-point.

14.45. The view that the rate schedule should be adjusted for the effects of changes in real incomes cannot, however, be ignored altogether. Even if there were no inflation, the use of an unchanged rate scale over an extended period would, in a growing economy, eventually result in all taxpayers being subject to the highest marginal rate of income tax.

14.46. Nevertheless, the problems arising from increases in real incomes are less immediate and obvious than those attributable to inflation because the effect of increases in rates of tax stemming solely from inflation is to reduce a taxpayer's real income net of tax whereas those increases in rates reflecting rising real income serve only to reduce the rate of increase of real after-tax income. It thus seems to the Committee appropriate that any policy to adjust the rate scale more regularly to compensate for the effects of rising money incomes on the level and pattern of income tax liability should concentrate on the inflation element.

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