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After the death of inflation: will fiscal drag survive?

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  • Friedrich Heinemann

Abstract

Declining inflation rates might have negative consequences for tax revenues. Phenomena such as the inflationary bracket creep in a progressive income tax system do not work any longer. With this background, the paper analyses the extent of fiscal drag for OECD countries since 1965. Some consideration of the role of money illusion and indexation in this context lays the theoretical base. A framework is presented that allows for the classification of fiscal structures with regard to the type of fiscal drag. The subsequent econometric panel analysis is performed for total and disaggregated government revenues. The results back theoretical considerations of inflation"s impact on different kinds of taxes, which tends to be positive for individual income taxes and social security contributions and is negative for corporate income taxation. The paper concludes that both declining inflation and changing tax structures limit the potential for future fiscal drag.

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Article provided by Institute for Fiscal Studies in its journal Fiscal Studies.

Volume (Year): 22 (2001)
Issue (Month): 4 (December)
Pages: 527-546.

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Handle: RePEc:ifs:fistud:v:22:y:2001:i:4:p:527-546.

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  1. Günther G. Schulze & Heinrich W. Ursprung, 1999. "Globalisation of the Economy and the Nation State," The World Economy, Wiley Blackwell, vol. 22(3), pages 295-352, 05.
  2. W. STEYN & F.C.v.N. FOURIE, 1996. "The Structure of Personal Income Tax in Times of Inflation: A Formula Tax," South African Journal of Economics, Economic Society of South Africa, vol. 64(4), pages 200-208, December.
  3. George A. Akerlof & William R. Dickens & George L. Perry, 1996. "The Macroeconomics of Low Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1), pages 1-76.
  4. Daniel Gros & Guyvandille, 1995. "Seigniorage and EMU: The Fiscal Implications of Price Stability and Financial Market Integration," Journal of Common Market Studies, Wiley Blackwell, vol. 33(2), pages 175-196, 06.
  5. Alberto Alesina & Roberto Perotti, 1995. "Fiscal Expansions and Fiscal Adjustments in OECD Countries," NBER Working Papers 5214, National Bureau of Economic Research, Inc.
  6. repec:fth:coluec:754 is not listed on IDEAS
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Cited by:
  1. John Creedy & Norman Gemmell, 2007. "Corporation Tax Buoyancy and Revenue Elasticity in the UK," Department of Economics - Working Papers Series 985, The University of Melbourne.
  2. David Fielding, 2011. "New Zealand: The Last Bastion of Textbook Open-Economy Macroeconomics," Working Papers 1105, University of Otago, Department of Economics, revised Jun 2011.
  3. 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.
  4. John Creedy & José Félix Sanz?Sanz, 2010. "Modelling Personal Income Taxation in Spain:Revenue Elasticities and Regional Comparisons," Department of Economics - Working Papers Series 1097, The University of Melbourne.

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