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Cold Progression and its Effects on Income Distribution

Listed author(s):
  • Burkhard Heer
  • Bernd Süssmuth

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.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 951.

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Date of creation: 2003
Handle: RePEc:ces:ceswps:_951
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