Tax bracket creep and its effects on income distribution
AbstractWe quantitatively analyze the way inflation alters the inequality of the income distribution in the U.S. economy. The main mechanism emphasized in this paper is the “bracket creep” effect according to which inflation pushes income into higher tax brackets. Governments adjust the nominal income tax brackets slowly and incompletely due to the rise in prices. In the U.S. postwar history, this typically happens less often than once every other tax year. In the first part of the paper, we study time series from the U.S. economy. As our central result we find that irrespective of the level of inflation more frequent income tax schedule adjustments make the relationship between inflation and income inequality more transitory in nature. In the second part of the paper, we develop a general equilibrium monetary model with income heterogeneity that is in line with our time series evidence. We find that a longer duration between two successive adjustments of the tax schedule reduces employment, savings, and output.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Macroeconomics.
Volume (Year): 38 (2013)
Issue (Month): PB ()
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Web page: http://www.elsevier.com/locate/inca/622617
Bracket creep; Progressive income taxation; Inflation; Income distribution;
Other versions of this item:
- Heer, Burkhard & Süssmuth, Bernd, 2013. "Tax bracket creep and its effects on income distribution," Working Papers 123, University of Leipzig, Faculty of Economics and Management Science.
- D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
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