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Cold Progression and its Effects on Income Distribution

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  • Burkhard Heer
  • Bernd Süssmuth

Abstract

We present new empirical evidence for the US economy that inflation reduces the inequality of the earnings distribution. The main mechanism emphasized in this paper is the tax income bracket effect. Governments only adjust the nominal income tax brackets slowly to a rise in prices, typically less often than once every other year in the US post-war history. We also develop a theoretical general equilibrium monetary model with income heterogeneity. In this model, the effect of higher inflation on income distribution is shown to be rather small. However, we find that a longer duration between two successive adjustments of the income tax schedule reduces employment, savings, and output significantly.

Suggested Citation

  • Burkhard Heer & Bernd Süssmuth, 2003. "Cold Progression and its Effects on Income Distribution," CESifo Working Paper Series 951, CESifo.
    • Handle: RePEc:ces:ceswps:_951
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    References listed on IDEAS

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    2. Dorcas Gonese & Asrat Tsegaye & Forget Kapingura & Sibanesizwe Alwyn Khumalo, 2022. "Trade Openness and Income Inequality: A Case of Southern African Development Community Countries," Eurasian Journal of Economics and Finance, Eurasian Publications, vol. 10(4), pages 135-151.
    3. Pierre Salmon, 2003. "The assignment of powers in an open-ended European Union," Post-Print hal-00445601, HAL.
    4. Stuart J. Fowler, 2005. "Income Inequality, Monetary Policy, and the Business Cycle," Working Papers 200507, Middle Tennessee State University, Department of Economics and Finance.
    5. Pedro S. Amaral, 2017. "Monetary Policy and Inequality," Economic Commentary, Federal Reserve Bank of Cleveland, issue January.

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