The Tanzi effect is an economic situation involving a period of high inflation in a country which results in a decline in the volume of tax collection and a deterioration of real tax proceeds being collected by the government of that country. This is due to the time elapsed between the moment the taxable event occurs and the collection of the tax becomes effective. The effect was noticed by economists since the 1920s but it was Italian economist Vito Tanzi that explained the actual causes in a 1977 paper. Previous hypothesis The effect has been known since the ending period after World War I. Italian economist Costantino Bresciani Turroni described a similar phenomenon for the German hyperinflation. Previous to the Tanzi paper, a common hypothesis was that the tax administration had somehow become less efficient than before the previous of high inflation. Another hypothesis was that in a period of high inflation people increase their rate of tax evasion. A more sophisticated version of this second hypothesis was that, as inflation rises, banking intermediation shrinks and credit becomes more scarce. In Argentina, the effect is known as the Olivera-Tanzi effect in recognition of , who noticed the association between the fall in tax revenue and high inflation. In Tanzi's words "Mr. Olivera had reported the fall but had not provided an explanation for it; instead he had focused on its implications for macroeconomic developments". Causes The legal obligation to pay a tax (tax liability) takes place when certain events occur. For example, the obligation to pay a tax on income takes place when income is earned. The obligation to pay a tax on sales occurs when an item subject to the sales tax is sold. The obligation to pay a tax on imports occurs when goods cross the frontier. All these taxable events establish a claim by the government from taxpayers and an obligation by the taxpayers with the government. However, for practical or administrative reasons, the actual tax payments were not being made immediately at the time the taxable event occurred, but some time later. In some cases, much later. For example, taxes on this year's income may not be due until next year. Taxes due on the sale of goods and services may not be paid to the government, by the seller of the goods who withholds the taxes from the consumers (say a shop), until sometime later