646PART TENMONEY AND PRICES IN THE LONG RUNThe taxes on nominal capital gains and on nominal interest income are twoexamples of how the tax code interacts with inflation. There are many others.Because of these inflation-induced tax changes, higher inflation tends to discour-age people from saving. Recall that the economy’s saving provides the resourcesfor investment, which in turn is a key ingredient to long-run economic growth.Thus, when inflation raises the tax burden on saving, it tends to depress the econ-omy’s long-run growth rate. There is, however, no consensus among economistsabout the size of this effect.One solution to this problem, other than eliminating inflation, is to index thetax system. That is, the tax laws could be rewritten to take account of the effects ofinflation. In the case of capital gains, for example, the tax code could adjust thepurchase price using a price index and assess the tax only on the real gain. In the
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