perhaps 30 or 60 days later. These delays in payment (these collection lags) have little importance when there is no inflation or when the rate of inflation is low. However, the higher the rate of inflation becomes, the lower the real value of the payment received by the government is compared with the value it would have if it had been made immediately after the taxable event; that is, without any delay. Thus, the collection lag becomes a fundamental variable in the determination of real tax revenue in situations of high inflation. When inflation is very high, and a country tries to finance public spending by printing more money, the act of printing more money, by increasing the rate of inflation, could reduce tax revenue by more than the real value of the income from inflationary finance (from the printing of money). Consequences A collection lag of two months, which was normal for the payment of sales taxes such as the value-added tax, combined with a monthly rate of inflation of 10%, would lead to a reduction in real tax revenue of about 20%. A monthly inflation rate of 20% would lead to a fall in real tax revenue of about 40%. Examples Examples of the Tanzi effect includes all countries with have experienced hyperinflation or very high inflation. Chile under Salvador Allende, Argentina in 1975. Solution Although efforts in reducing the collection lag can help, controlling the inflation is the recommended policy. A decrease in inflation will lead to an increase in tax revenue. For example, in 1991, Argentina introduced the convertibility plan that tied the peso to the dollar, abruptly reducing the rate of inflation. The great deceleration in the rate of inflation led to a large increase in real tax revenue. Some countries such as Brazil and Chile went as far as indexing the tax liability for the rate of inflation so as to reduce or neutralize the impact of the tax collection lag on tax revenue. See also Inflation Hyperinflation Tax revenue References Bibliography Tanzi, Vito, "Inflation, Lags in Collection, and the Real Value of Tax Revenue", Staff Papers, vol. 24, March 1977, IMF, 1977, pp. 154–167. External links Inflation Theory of taxation Psychological effects