Tax rates, progressivity and de facto fiscal indexation in ten European countries

Kostoris, Fiorella

doi:10.1007/978-94-011-1538-4_10

Cited by 2 publications

(4 citation statements)

References 6 publications

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“…The following framework, which is similar to that used in Padoa Schioppa Kostoris (1993), is helpful in differentiating precisely between nominal and real fiscal drag. The following equation serves to define both concepts and to relate them to indexation:…”

Section: The Classification Approachmentioning

confidence: 99%

“…This static approach fails to take into account the fact that the tax system is endogenous itself and that changes to the system are probably driven also by the extent of inflation and real growth. There can be a substantial difference between the degree of de lege indexation and de facto indexation (Padoa Schioppa Kostoris, 1993), where the latter takes into account discretionary changes of tax rules that happen in the political process as a reaction to inflation. The German case is an illustrative example.…”

Section: Introductionmentioning

confidence: 99%

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After the Death of Inflation: Will Fiscal Drag Survive?

Heinemann

2003

SSRN Journal

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In recent years, politicians like to ascribe lower growth rates of tax revenues to globalization and the consequences of tax competition. Less interest is paid to another possible explanation: Inflation rates have decreased markedly in industrial countries. The phenomenon of inflation -even of a moderate level -boosting tax revenues is well known under the term "fiscal drag". It is, however, important to differentiate between a real and a nominal type of fiscal drag Nominal fiscal drag can work the following way: With a progressive tax system and in the absence of perfect indexation, inflation shifts taxpayers into tax brackets with higher marginal tax rates. This so called "bracket creep" leads to rising tax income ratios. Since with positive nominal growth this relationship holds even in the absence of any real growth, the phenomenon can be called "nominal fiscal drag". The real type of fiscal drag does not depend on inflation. "Real fiscal drag" exists if the tax income ratio reacts positively to an increasing real income.For economic thinking it is not very pleasant to accept the existence of nominal fiscal drag since it implies the existence of some form of money illusion in the political system. There is, however, pervasive evidence of empirical psychology for widely spread money illusion. Money illusion in the context of wages has a close relation to money illusion in the context of taxes. In the case of wages workers more likely accept a cut of real wages with nominal wage stability than with nominal reductions of wages. The case of taxes and voters has an equivalent psychological structure: Voters more likely accept an increasing real tax burden with a constant nominal net income than with a shrinking nominal net income.The degree of money illusion might differ among countries, for different kinds of taxes and it will also depend on the extent of inflation. Fiscal exploitation of money illusion is easy if inflation automatically increases real tax revenues without further political actions required.With this background it is the objective of this study to measure by the use of time series analysis the extent of both types of fiscal drag for different countries and different kinds of taxes. The time series approach is preferable to looking at the characteristics of a given tax system for a certain point in time. This static approach fails to take into account the fact that the tax system is endogenous itself and that changes of the system are probably driven also by the extent of inflation and real growth. 2The study is based on OECD countries' experience since 1965. The results allow for a classification of countries which is helpful to identify cases that indeed might be confronted with a tighter fiscal constraint in the future due to the end of high inflation rates.The results suggest that the decline of long run average inflation rates will make a fiscal difference for a majority of OECD countries. In these countries, tax revenues benefit from inflation. This overall nominal fiscal drag works mainly ...

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Section: The Classification Approachmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

After the Death of Inflation: Will Fiscal Drag Survive?

Heinemann

2003

SSRN Journal

View full text Add to dashboard Cite

show abstract

“…For the further analysis the following framework is used inspired loosely by a similar classification in PADOA SCHIOPPA KOSTORIS (1993). Equation (1) serves to define the concepts of real and nominal fiscal drag and to relate this differentiation to indexation.…”

Section: The Classification Approachmentioning

confidence: 99%

“…This static approach fails to take into account the fact that the tax system is endogenous itself and that changes of the system are probably driven also by the extent of inflation and real growth. There can be a substantial difference between the degree of de lege indexation and de facto indexation (PADOA SCHIOPPA KOSTORIS, 1993) where the latter takes into account discretionary changes of tax rules that happen in the political process as a reaction to inflation. The German case is an illustrative example.…”

Section: Introductionmentioning

confidence: 99%

After the death of inflation: will fiscal drag survive?

Heinemann

2001

Fiscal Studies

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Tax rates, progressivity and de facto fiscal indexation in ten European countries

Cited by 2 publications

References 6 publications

After the Death of Inflation: Will Fiscal Drag Survive?

After the Death of Inflation: Will Fiscal Drag Survive?

After the death of inflation: will fiscal drag survive?

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