IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/57664.html
   My bibliography  Save this paper

Bracket Creep Revisited: Progressivity and a Solution by Adjusting the Rich Tax in Germany

Author

Listed:
  • Flores Unzaga, Ismael Martin
  • Zhu, Junyi

Abstract

This paper studies the redistributive and revenue effects of bracket creep in Germany under various inflation scenarios and evaluates the feasibility to charge a rich tax to fight bracket creep for the income distribution in 2009. Using a tax micro-simulation model developed for the newly available PHF data, we document an inverted U-shaped overall redistribution effect of the tax system with respect to the inflation rate, which contrasts Immervoll (2005) who finds that the fiscal drag always enhances the equalizing property. Delaying indexation might not be better off in terms of inequality. A politically in-between approach is proposed to raise the marginal tax rate for the top bracket to compensate the government revenue loss due to indexing the tax schedule in Germany. The rich tax required for fully financing the indexation can be sizable. Under our simulation environment, this rate can reach above 75% with four years’ inaction on 4% annual inflation. When this rich tax can be fiscally possible, it can totally offset the decrease of global redistribution effect from indexation. Our results echo the inequality indexing proposed by Burman, Shiller, Leiserson, Rohaly and Kennedy (2007) by suggesting institutionalizing a joint adjustment of rich tax and bracket creep / inflation indexing which justifies a pro-growth, risk reducing, revenue-neutral and framing effective policy.

Suggested Citation

  • Flores Unzaga, Ismael Martin & Zhu, Junyi, 2014. "Bracket Creep Revisited: Progressivity and a Solution by Adjusting the Rich Tax in Germany," MPRA Paper 57664, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:57664
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/57664/1/MPRA_paper_57664.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Michael Broer, 2011. "Kalte Progression in der Einkommensbesteuerung," Wirtschaftsdienst, Springer;ZBW - Leibniz Information Centre for Economics, vol. 91(10), pages 694-698, October.
    2. Gerlinde Verbist & Francesco Figari, 2013. "GINI DP 88: The redistributive effect and progressivity of taxes revisited: An International Comparison across the European Union," GINI Discussion Papers 88, AIAS, Amsterdam Institute for Advanced Labour Studies.
    3. Adam, Klaus & Billi, Roberto M., 2014. "Distortionary fiscal policy and monetary policy goals," Economics Letters, Elsevier, vol. 122(1), pages 1-6.
    4. Emmanuel Saez, 2010. "Do Taxpayers Bunch at Kink Points?," American Economic Journal: Economic Policy, American Economic Association, vol. 2(3), pages 180-212, August.
    5. Michael S. Dahl & Olav Sorenson, 2008. "The Social Attachment to Place," DRUID Working Papers 08-24, DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies.
    6. Stefan Bach & Peter Haan & Richard Ochmann, 2013. "Reformvorschläge zur Einkommensteuer: mehr echte und weniger kalte Progression," DIW Wochenbericht, DIW Berlin, German Institute for Economic Research, vol. 80(30), pages 3-12.
    7. Saez, Emmanuel, 2003. "The effect of marginal tax rates on income: a panel study of 'bracket creep'," Journal of Public Economics, Elsevier, vol. 87(5-6), pages 1231-1258, May.
    8. R. A. Musgrave & Tun Thin, 1948. "Income Tax Progression, 1929-48," Journal of Political Economy, University of Chicago Press, vol. 56, pages 498-498.
    9. Simula, Laurent & Trannoy, Alain, 2010. "Optimal income tax under the threat of migration by top-income earners," Journal of Public Economics, Elsevier, vol. 94(1-2), pages 163-173, February.
    10. Ivica Urban, 2009. "Kakwani decomposition of redistributive effect: Origins, critics and upgrades," Working Papers 148, ECINEQ, Society for the Study of Economic Inequality.
    11. Plotnick, Robert, 1981. "A Measure of Horizontal Inequity," The Review of Economics and Statistics, MIT Press, vol. 63(2), pages 283-288, May.
    12. Atkinson, Anthony B., 1970. "On the measurement of inequality," Journal of Economic Theory, Elsevier, vol. 2(3), pages 244-263, September.
    13. Karl Brenke & Markus M. Grabka, 2011. "Schwache Lohnentwicklung im letzten Jahrzehnt," DIW Wochenbericht, DIW Berlin, German Institute for Economic Research, vol. 78(45), pages 3-15.
    14. von Kalckreuth, Ulf & Eisele, Martin & Le Blanc, Julia & Schmidt, Tobias & Zhu, Junyi, 2012. "The PHF: A comprehensive panel survey on household finances and wealth in Germany," Discussion Papers 13/2012, Deutsche Bundesbank.
    15. Schmidt, Thomas-Patrick & Müller, Heiko, 2012. "Die Elastizitat des zu versteuernden Einkommens in Deutschland: Eine empirische Untersuchung auf Basis des deutschen Taxpayer-Panels," arqus Discussion Papers in Quantitative Tax Research 132, arqus - Arbeitskreis Quantitative Steuerlehre.
    16. Heer, Burkhard & Süssmuth, Bernd, 2013. "Tax bracket creep and its effects on income distribution," Journal of Macroeconomics, Elsevier, vol. 38(PB), pages 393-408.
    17. Gerlinde Verbist & Francesco Figari, 2014. "The Redistributive Effect and Progressivity of Taxes Revisited: An International Comparison across the European Union," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 70(3), pages 405-429, September.
    18. Stefan Bach, 2012. "Abbau der kalten Progression: nicht die einzige Herausforderung beim Einkommensteuertarif," DIW Wochenbericht, DIW Berlin, German Institute for Economic Research, vol. 79(12), pages 17-21.
    19. Herwig Immervoll, 2005. "Falling Up The Stairs: The Effects Of “Bracket Creep” On Household Incomes," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 51(1), pages 37-62, March.
    20. Kakwani, Nanok C, 1977. "Measurement of Tax Progressivity: An International Comparison," Economic Journal, Royal Economic Society, vol. 87(345), pages 71-80, March.
    21. Aronson, J Richard & Johnson, Paul & Lambert, Peter J, 1994. "Redistributive Effects and Unequal Income Tax Treatment," Economic Journal, Royal Economic Society, vol. 104(423), pages 262-270, March.
    22. Young, Cristobal & Varner, Charles, 2011. "Millionaire Migration and State Taxation of Top Incomes: Evidence From a Natural Experiment," National Tax Journal, National Tax Association;National Tax Journal, vol. 64(2), pages 255-283, June.
    23. Gianni Betti & Gabriella Donatiello & Vijay Verma, 2011. "The siena microsimulation model (sm2) for net-gross conversion of eu-silc income variables," International Journal of Microsimulation, International Microsimulation Association, vol. 4(1), pages 35-53.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Junyi Zhu, 2014. "Bracket Creep Revisited - with and without r > g: Evidence from Germany," Journal of Income Distribution, Ad libros publications inc., vol. 23(3), pages 106-158, November.
    2. Chang Woon Nam & Christoph Zeiner, 2015. "Effects of Bracket Creep and Tax Reform on Average Personal Income Tax Burden in Germany," CESifo Working Paper Series 5626, CESifo.
    3. Levy, Horacio & Nogueira, José Ricardo & Siqueira, Rozane Bezerra & Immervoll, Herwig & O'Donoghue, Cathal, 2010. "Simulating the impact of inflation on the progressivity of personal income tax in Brazil," Revista Brasileira de Economia - RBE, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil), vol. 64(4), December.
    4. Nicolas Herault & Stephen P. Jenkins, 2021. "Redistributive effect and the progressivity of taxes and benefits: evidence for the UK, 1977–2018," Working Papers 592, ECINEQ, Society for the Study of Economic Inequality.
    5. Nolan, Matt, 2018. "Horizontal and Vertical Equity in the New Zealand Tax-Transfer System: 1988-2013," Working Paper Series 7657, Victoria University of Wellington, Chair in Public Finance.
    6. Immervoll, Herwig, 2004. "Falling up the stairs: an exploration of the effects of ‘bracket creep’ on household incomes," EUROMOD Working Papers EM3/04, EUROMOD at the Institute for Social and Economic Research.
    7. Duclos, Jean-Yves & Tabi, Martin, 1999. "Inégalité et redistribution du revenu, avec une application au Canada," L'Actualité Economique, Société Canadienne de Science Economique, vol. 75(1), pages 95-122, mars-juin.
    8. Liu Baihui, 2017. "Redistributive Effect of Taxes and Transfers: Evidence from China," Journal of Tax Reform, Graduate School of Economics and Management, Ural Federal University, vol. 3(1), pages 43-51.
    9. Duclos, Jean-Yves & Jalbert, Vincent & Araar, Abdelkrim, 2000. "Classical Horizontal Inequity and Reranking: an Integrated Approach," Cahiers de recherche 0002, Université Laval - Département d'économique.
    10. Ivica Urban, 2014. "Contributions of taxes and benefits to vertical and horizontal effects," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 42(3), pages 619-645, March.
    11. Hérault, Nicolas & Jenkins, Stephen P., 2021. "Redistributive effect and the progressivity of taxes and benefits: evidence for the UK, 1977–2018," LSE Research Online Documents on Economics 112679, London School of Economics and Political Science, LSE Library.
    12. Peter Lambert & Thor Thoresen & Runa Nesbakken, 2010. "On the Meaning and Measurement of Redistribution in Cross-Country Comparisons," LIS Working papers 532, LIS Cross-National Data Center in Luxembourg.
    13. Duclos, J.Y. & Tabi, M., 1996. "Linear Inequality Measures and the Redistribution of Income," Papers 9613, Laval - Recherche en Politique Economique.
    14. Hayes, Kathy J. & Lambert, Peter J. & Slottje, Daniel J., 1995. "Evaluating effective income tax progression," Journal of Public Economics, Elsevier, vol. 56(3), pages 461-474, March.
    15. Peter J. Lambert, 2004. "Income Taxation and Equity," Working Papers 2004/4, Institut d'Economia de Barcelona (IEB).
    16. Süssmuth, Bernd & Wieschemeyer, Matthias, 2022. "Taxation and the distributional impact of inflation: The U.S. post-war experience," Economic Modelling, Elsevier, vol. 111(C).
    17. Duclos, Jean-Yves & Jalbert, Vincent & Araar, Abdelkrim, 2003. "Classical Horizontal Inequity and Reranking: an Integrating Approach," Cahiers de recherche 0306, CIRPEE.
    18. van Doorslaer, Eddy & Wagstaff, Adam & van der Burg, Hattem & Christiansen, Terkel & Citoni, Guido & Di Biase, Rita & Gerdtham, Ulf-G. & Gerfin, Mike & Gross, Lorna & Hakinnen, Unto, 1999. "The redistributive effect of health care finance in twelve OECD countries," Journal of Health Economics, Elsevier, vol. 18(3), pages 291-313, June.
    19. Chakravarty, Satya R. & Sarkar, Palash, 2022. "A synthesis of local and effective tax progressivity measurement," MPRA Paper 115180, University Library of Munich, Germany.
    20. repec:ebl:ecbull:v:3:y:2003:i:19:p:1-16 is not listed on IDEAS
    21. Ivica Urban, 2009. "Kakwani decomposition of redistributive effect: Origins, critics and upgrades," Working Papers 148, ECINEQ, Society for the Study of Economic Inequality.

    More about this item

    Keywords

    Inflation; Fiscal Drag; Rich Tax; Progressivity of Income Tax; Income Distribution; Micro-simulation; Inequality Indexation;
    All these keywords.

    JEL classification:

    • C81 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Microeconomic Data; Data Access
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:57664. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.