Unlocking the Mystery of Taxes and Inflation

Abstract

Inflation can be defined as rising in prices over time and imposing new taxes or even increasing the current rates of taxes may increase these prices leading to a higher inflation rate. The broad inquiry in this study was about the effect of imposing taxes for the first time on the inflation rates and the main objective was to develop a model that uses corporate tax, VAT, and other controlling variables to predict the inflation rates after imposing taxes. The inflation rate used in this study was measured by both consumer price index and GDP deflator. A quantitative methodology was followed to explore the main issues of the study using data of some of GCC countries including United Arab Emirates, Qatar, Oman, and Saudi Arabia, in addition to Jordan and covering different periods based on the availability of data. Collected data were analyzed using OLS regression. The results of the study showed that VAT is not a significant variable to predict inflation rate after its imposing while corporate tax is significant in one country (Oman) and only when the inflation rate is measured using the GDP deflator.