This paper analyses 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 UK. 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. This second effect more than compensates for the decline in progressivity and leads to an overall increase of relevant redistribution measures. Existing adjustment regimes used in the Netherlands and the UK are successful at preventing large tax burdens changes resulting from inflation-induced nominal income changes.
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Paper provided by EUROMOD at the Institute for Social and Economic Research in its series EUROMOD Working Papers with number
EM3/04.
Length: Date of creation: 01 Jul 2004 Date of revision:
01 Oct 2004 Handle: RePEc:ese:emodwp:em3/04
Note: European Union, Microsimulation, Inflation, Income Tax, Social Insurance Contributions, Fiscal Drag, Income Distribution Contact details of provider: Postal: RAB Butler Building, University of Essex, Wivenhoe Park, Colchester, ESSEX C04 3SQ Phone: +44 (0)1206 872957 Fax: +44 (0)1206 873151 Email: Web page: http://www.iser.essex.ac.uk/research/euromod/ More information through EDIRC
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Find related papers by JEL classification: C81 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Microeconomic Data H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
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