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Fiscal Drag - An Automatic Stabiliser?

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  • Immervoll, H.

Abstract

Inflation can alter the structure of tax systems and lead to higher real tax burdens. The ‘automatic stabiliser’ argument assumes that increasing tax burdens reduce consumption and thereby aggregate demand, acting as an automatic stabiliser which helps to ‘cool down’ the economy in times of inflation. This argument, however, only looks at the demand side, ignoring any effects that higher tax burdens may have on the cost of production. If employees bear less then the full burden of higher taxes then real labour costs will also go up, generating a cost-push upwards pressure on prices and opening up the possibility of a wage-price spiral. I compute distributions of inflation induced changes of marginal and average effective tax rates for four European countries using a preliminary version of EUROMOD, a European tax-benefit model. Possible wage effects of these changes are then discussed in an imperfect labour market framework.

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Bibliographic Info

Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0025.

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Date of creation: Dec 2000
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Handle: RePEc:cam:camdae:0025

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Cited by:
  1. Herwig Immervoll & Cathal O'Donoghue, 2003. "Towards A Multi-Purpose Framework For Tax-Benefit Microsimulation," Computational Economics 0302002, EconWPA.
  2. repec:ese:emodwp:em5-06 is not listed on IDEAS
  3. repec:ese:emodwp:em4-01 is not listed on IDEAS
  4. Li, Jinjing & O'Donoghue, Cathal, 2011. "Incentives of Retirement Transition for Elderly Workers: An Analysis of Actual and Simulated Replacement Rates in Ireland," IZA Discussion Papers 5865, Institute for the Study of Labor (IZA).
  5. Herwig Immervoll & Cathal O'Donoghue, 2003. "Welfare Benefits and Work Incentives. An Analysis of the Distribution of Net Replacement Rates in Europe using EUROMOD, a Multi- Country Microsimulation Model," Labor and Demography 0302001, EconWPA.
  6. repec:ese:emodwp:em3-02 is not listed on IDEAS
  7. 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.
  8. repec:ese:emodwp:em2-01 is not listed on IDEAS
  9. 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.
  10. repec:ese:emodwp:em9-01 is not listed on IDEAS

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