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Falling Up The Stairs: The Effects Of "Bracket Creep" On Household Incomes

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  • Herwig Immervoll

Abstract

This paper analyzes how inflation-induced erosions of nominally defined amounts built into relevant tax rules ("bracket creep") alter distributional and revenue-generating properties of income taxes and social insurance contributions. Using a multi-country tax-benefit model, it provides quantitative estimates for Germany, the Netherlands and the U.K. In the absence of automatic inflation adjustment mechanisms, effects on individual tax burdens can be substantial, even with low inflation. Bracket creep is found to reduce tax progressivity. At the same time, overall tax revenues increase. In terms of tax systems' equalizing capacities, which depend on both these factors, the second effect dominates: if tax systems were left unadjusted then inflation would lead to lower and slightly more equally distributed household incomes. However, existing inflation adjustment regimes in the Netherlands and the U.K. successfully prevent large tax burdens changes. Copyright 2005 Blackwell Publishing Ltd.

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Bibliographic Info

Article provided by International Association for Research in Income and Wealth in its journal Review of Income and Wealth.

Volume (Year): 51 (2005)
Issue (Month): 1 (03)
Pages: 37-62

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Handle: RePEc:bla:revinw:v:51:y:2005:i:1:p:37-62

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Cited by:
  1. Samuel Calonge & Oriol Tejada, 2009. "A theoretical and practical study on linear reforms of dual taxes," Working Papers, Xarxa de Referència en Economia Aplicada (XREAP) XREAP2009-01, Xarxa de Referència en Economia Aplicada (XREAP), revised Feb 2009.
  2. Flores Unzaga, Ismael Martin & Zhu, Junyi, 2014. "Bracket Creep Revisited: Progressivity and a Solution by Adjusting the Rich Tax in Germany," EconStor Preprints 100006, ZBW - German National Library of Economics.
  3. Horacio Levy & José Ricardo Nogueira & Rozane Bezerra Siqueira & Herwig Immervoll & Cathal O'Donoghue, 2010. "Simulating the impact of inflation on the progressivity of personal income tax in Brazil," Revista Brasileira de Economia, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 64(4), pages 405-422, December.
  4. Flores Unzaga, Ismael Martin & Zhu, Junyi, 2014. "Bracket Creep Revisited: Progressivity and a Solution by Adjusting the Rich Tax in Germany," MPRA Paper 57664, University Library of Munich, Germany.
  5. Herwig Immervoll & Linda Richardson, 2011. "Redistribution Policy and Inequality Reduction in OECD Countries: What Has Changed in Two Decades?," OECD Social, Employment and Migration Working Papers 122, OECD Publishing.
  6. Bargain, Olivier, 2009. "The Distributional Effects of Tax-Benefit Policies under New Labour: A Shapley Decomposition," IZA Discussion Papers 4296, Institute for the Study of Labor (IZA).
  7. Fiorio, Carlo V & Saget, Catherine, 2010. "Reducing or aggravating inequality? : Preliminary findings from the 2008 financial crisis," ILO Working Papers, International Labour Organization 456487, International Labour Organization.
  8. Hechtner, Frank & Massarrat-Mashhadi, Nima & Sielaff, Christian, 2012. "Eine Analyse zur Einkommensteuerbelastung und Wirkung der kalten Progression der vergangenen 20 Jahre in Deutschland," arqus Discussion Papers in Quantitative Tax Research 137, arqus - Arbeitskreis Quantitative Steuerlehre.
  9. Fuchs, Michael & Lietz, Christine, 2007. "Effect of changes in tax/benefit policies in Austria, 1998-2005," EUROMOD Working Papers EM3/07, EUROMOD at the Institute for Social and Economic Research.
  10. Samuel Calonge & Oriol Tejada, 2009. "A theoretical and practical study on linear reforms of dual taxes," Working Papers in Economics, Universitat de Barcelona. Espai de Recerca en Economia 218, Universitat de Barcelona. Espai de Recerca en Economia.

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