Fiscal drag
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Fiscal drag happens when the government's net
deflationary
pressure, or drag, on the economy, essentially due to lack of state spending or to excess taxation.
One cause of fiscal drag may be
progressive taxation increases automatically as taxpayers move into higher tax brackets due to inflation
. This tends to moderate inflation, and can be characterized as an automatic stabilizer to the economy. Fiscal drag can also be a result of a hawkish stance towards government finances.
Real fiscal drag
Real fiscal drag takes place when tax thresholds are increased in line with price rises to avoid nominal fiscal drag, but where a growing economy means that earnings rise faster still, so increasing taxes as proportion of earnings.
Political dimension
wage inflation to retain purchasing power parity
.
See also
- Fiscal deficit
- Bracket Creep
References
- The Economist Economics A-Z: Fiscal drag
- Fiscal drag hits some taxpayers harder than others, new OECD study shows
Taxing Wages 2006/2007: 2007 Edition, OECD.
- Fiscal Drag - An Automatic Stabiliser?, by Herwig Immervoll
- After the Death of Inflation: Will Fiscal Drag Survive?, by Friedrich Heinemann
- Tax bands, a chancellor's best friends, BBC News