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Falling Up The Stairs: The Effects Of "Bracket Creep" On Household Incomes

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  • Herwig Immervoll

Abstract

This paper analyzes 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 U.K. 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. In terms of tax systems' equalizing capacities, which depend on both these factors, the second effect dominates: if tax systems were left unadjusted then inflation would lead to lower and slightly more equally distributed household incomes. However, existing inflation adjustment regimes in the Netherlands and the U.K. successfully prevent large tax burdens changes. Copyright 2005 Blackwell Publishing Ltd.

Suggested Citation

  • 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.
  • Handle: RePEc:bla:revinw:v:51:y:2005:i:1:p:37-62
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    Cited by:

    1. 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, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 64(4), December.
    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 Group Munich.
    3. Immervoll, Herwig & Richardson, Linda, 2011. "Redistribution Policy and Inequality Reduction in OECD Countries: What Has Changed in Two Decades?," IZA Discussion Papers 6030, Institute for the Study of Labor (IZA).
    4. Fuchs, Michael & Lietz, Christine, 2007. "Effect of changes in tax/benefit policies in Austria, 1998-2005," EUROMOD Working Papers EM3/07, EUROMOD at the Institute for Social and Economic Research.
    5. Olivier Bargain, 2009. "The distributional effects of tax-benefit policies under New Labour : a Shapley decomposition," Working Papers 200907, School of Economics, University College Dublin.
    6. Zhu, Junyi, 2015. "Bracket creep revisited - with and without r>g: Evidence from Germany," Discussion Papers 37/2015, Deutsche Bundesbank.
    7. Samuel Calonge & Oriol Tejada, 2009. "A theoretical and practical study on linear reforms of dual taxes," Working Papers in Economics 218, Universitat de Barcelona. Espai de Recerca en Economia.
    8. 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.
    9. 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.
    10. Fiorio, Carlo V. & Saget, Catherine., 2010. "Reducing or aggravating inequality? : Preliminary findings from the 2008 financial crisis," ILO Working Papers 994564873402676, International Labour Organization.
    11. Estévez Schwarz, Diana & Sommer, Eric, 2018. "Smooth Income Tax Schedules: Derivation and Consequences," IZA Discussion Papers 11493, Institute for the Study of Labor (IZA).
    12. repec:ilo:ilowps:456487 is not listed on IDEAS
    13. repec:kap:jecinq:v:15:y:2017:i:4:d:10.1007_s10888-017-9369-3 is not listed on IDEAS
    14. Süssmuth, Bernd & Wieschemeyer, Matthias, 2017. "Progressive tax-like effects of inflation: Fact or myth? The U.S. post-war experience," IWH Discussion Papers 33/2017, Halle Institute for Economic Research (IWH).
    15. Flores Unzaga, Ismael Martin & Zhu, Junyi, 2014. "Bracket Creep Revisited: Progressivity and a Solution by Adjusting the Rich Tax in Germany," EconStor Preprints 100006, ZBW - German National Library of Economics.

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