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Hidden tax increases - the extra tax burden of the bracket creep and the expected impact of income tax rates "on wheels" on tax reliefs

Author

Listed:
  • Clemens Fuest
  • Björn Kauder
  • Luisa Lorenz
  • Martin Mosler
  • Niklas Potrafke
  • Florian Dorn

Abstract

• Bracket creep is weakening the distribution effects of the taxation system and leading to a rise in the tax ratio that is beyond democratic control. The elimination of bracket creep is therefore advisable. • The public debate mostly focuses on bracket creep in the narrower sense of the term, which only takes into account the effect of rising prices. This bracket creep in the narrow sense of the term alone led to additional tax revenues of 33.5 billion euros from 2011 to 2016. If the effect of rising real wages (bracket creep in the larger sense of the term) is also taken into consideration, the additional tax revenues during this period total 70.1 billion euros. • The impact of the burden caused by bracket creep is not equally distributed among income tax payers. Income tax payers in the low and medium income tax brackets are particularly negatively affected by bracket creep. • Bracket creep in the narrower sense of the term will lead to an increase in income tax revenues of a total of 314.9 billion euros during the period of 2017 to 2030. If the tax ratio is to be kept constant, or if bracket creep is considered in the wider sense of the term, cumulative "hidden" additional tax revenues will be as high as 433.6 billion euros. • A "rolling rate" is proposed whereby a tax rate parameter and creep areas are coupled with inflation and growth in real income (bracket creep in the broader sense), in order to keep the tax ratio constant ceteris paribus. • State revenues continue to grow even with a "rolling rate": even if bracket creep in the wider sense is taken into account, public income continues to rise in line with growth in price levels and real wages.

Suggested Citation

  • Clemens Fuest & Björn Kauder & Luisa Lorenz & Martin Mosler & Niklas Potrafke & Florian Dorn, 2016. "Hidden tax increases - the extra tax burden of the bracket creep and the expected impact of income tax rates "on wheels" on tax reliefs," ifo Forschungsberichte, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 76.
  • Handle: RePEc:ces:ifofob:76
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    Cited by:

    1. Florian Dorn & Clemens Fuest & Björn Kauder & Luisa Lorenz & Martin Mosler & Niklas Potrafke & Luisa Dörr, 2017. "How Bracket Creep Creates Hidden Tax Increases: Evidence from Germany," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 15(04), pages 34-39, December.
    2. Heinz Gebhardt & Lars-H. R. Siemers, 2018. "Zur strukturellen Finanzlage der Laender: eine aktuelle Auswertung und Methodenkritik," MAGKS Papers on Economics 201837, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    3. Florian Dorn & Clemens Fuest & Björn Kauder & Luisa Lorenz & Martin Mosler & Potrafke. Niklas & Luisa Dörr, 2017. "Bracket Creep – Distribution Effects of a Rolling Income Tax Rate," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 70(03), pages 28-39, February.
    4. Florian Dorn & Clemens Fuest & Björn Kauder & Luisa Lorenz & Martin Mosler & Niklas Potrafke & Luisa Dörr, 2017. "Tax Increases Via the Back Door – Fiscal Revenue Impact of Bracket Creep," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 70(02), pages 51-58, January.
    5. Baumann, Alexendra & Wohlrabe, Klaus, 2019. "Publikationen von Wirtschaftsforschungsinstituten im deutschsprachigen Raum - Eine bibliometrische Analyse [Publications of Economic Research Insitutes in the German Speaking Area - A bibliometric ," MPRA Paper 92240, University Library of Munich, Germany.
    6. Clemens Fuest & Stefanie Gäbler & Björn Kauder & Luisa Lorenz & Martin Mosler & Luisa Dörr, 2017. "Reform of the income tax: the rate of the Federal State of Lower Saxony," ifo Forschungsberichte, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 82.
    7. Dieter Dziadkowski, 2020. "Plea and Proposal for a Constitutional and Transparent Income Tax Rate - Notes on 25 Years of Theses of the Income Tax Commission," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 73(01), pages 30-33, January.
    8. Florian Dorn & Clemens Fuest & Fabian Häring & Björn Kauder & Luisa Lorenz & Martin Mosler & Luisa Dörr, 2017. "Eliminating the Middle-class Bulge – Income Tax Reform Options and their Fiscal Costs," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 70(09), pages 31-38, May.
    9. Ademmer, Martin & Boysen-Hogrefe, Jens & Fiedler, Salomon & Groll, Dominik & Jannsen, Nils & Kooths, Stefan & Potjagailo, Galina & Wolters, Maik H., 2017. "Deutsche Konjunktur im Herbst 2017 - Deutsche Wirtschaft nähert sich der Hochkonjunktur [German Economy Autumn 2017 - German economy approaches boom period]," Kieler Konjunkturberichte 35, Kiel Institute for the World Economy (IfW Kiel).
    10. repec:ces:ifodic:v:15:y:2018:i:4:p:50000000000859 is not listed on IDEAS
    11. Florian Dorn & Björn Kauder & Manuela Krause & Niklas Potrafke, 2017. "Inheritance Tax in Germany – Need for Reform and Compromises," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 70(01), pages 33-40, January.
    12. Dieter Dziadkowski, 2018. "Plea for a Realistic Income Tax Rate Structure," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 71(11), pages 35-47, June.
    13. FlorianDorn & ClemensFuest & BjörnKauder & LuisaLorenz & MartinMosler & NiklasPotrafke & LuisaDörr, 2018. "How Bracket Creep Creates Hidden Tax Increases: Evidence from Germany," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 15(04), pages 34-39, January.
    14. Florian Dorn & Stefanie Gäbler & Björn Kauder & Manuela Krause & Luisa Lorenz & Niklas Potrafke, 2017. "Income Tax in Germany – Is There a Need for Reform?," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 70(15), pages 31-37, August.
    15. Franz Xaver Peteranderl & Clemens Fuest & Franz Josef Pschierer & Schanz,Deborah, 2018. "Abundantly Flowing Tax Revenues, Huge Challenges – Expectations for Sustainable Taxation and Fiscal Policies," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 71(06), pages 03-17, March.
    16. Florian Dorn & Clemens Fuest & Björn Kauder & Luisa Lorenz & Martin Mosler & Luisa Dörr, 2017. "The removal of the middle class bulge - models and costs," ifo Forschungsberichte, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 77.
    17. Boysen-Hogrefe, Jens, 2018. "Trotz voller Kassen: Nicht jedes Wahlversprechen im nächsten Koalitionsvertrag umsetzen!," Kiel Policy Brief 112, Kiel Institute for the World Economy (IfW Kiel).

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    JEL classification:

    • D30 - Microeconomics - - Distribution - - - General
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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