Book contents
- Frontmatter
- Contents
- Preface
- 1 Inflation and personal income taxation: an introduction to the main issues
- 2 Inflation and the real progression of the rates: problems and solutions
- 3 Inflation and the real progression of the rates: countries' experiences
- 4 Inflation and the taxation of capital gains: problems and solutions
- 5 Inflation and the taxation of interest income: problems and solutions
- 6 Inflation and the taxation of business incomes
- 7 Inflation, lags in collection, and the real value of income tax revenue
- 8 Sensitivity of personal income tax yield to income changes: theory and measurement
- 9 Indexing the personal income tax for inflation and real growth
- 10 Inflation, income taxes, and the equilibrium rate of interest: theory
- 11 Inflation, income taxes, and interest rates: some empirical results
- 12 Inflation, indexation, and the wage-tax spiral
- 13 Some general conclusions on indexation
- Notes
- Index
9 - Indexing the personal income tax for inflation and real growth
Published online by Cambridge University Press: 07 October 2011
- Frontmatter
- Contents
- Preface
- 1 Inflation and personal income taxation: an introduction to the main issues
- 2 Inflation and the real progression of the rates: problems and solutions
- 3 Inflation and the real progression of the rates: countries' experiences
- 4 Inflation and the taxation of capital gains: problems and solutions
- 5 Inflation and the taxation of interest income: problems and solutions
- 6 Inflation and the taxation of business incomes
- 7 Inflation, lags in collection, and the real value of income tax revenue
- 8 Sensitivity of personal income tax yield to income changes: theory and measurement
- 9 Indexing the personal income tax for inflation and real growth
- 10 Inflation, income taxes, and the equilibrium rate of interest: theory
- 11 Inflation, income taxes, and interest rates: some empirical results
- 12 Inflation, indexation, and the wage-tax spiral
- 13 Some general conclusions on indexation
- Notes
- Index
Summary
Real growth and fiscal drag
Given the statutory structure of the personal income tax of a country, the average tax rate (i.e., the ratio of total income tax revenue to gross income) will increase whenever the country's income at current prices rises. It will not matter whether the increase in income is due to price changes, to real growth, or to both. The percentage increase in the average tax rate over a given period of time will depend on the rate of growth of current income and on the elasticity of the tax. The absolute increase, however, will depend also on the tax rate itself. The higher the tax rate at a given moment, the greater the absolute increase in the rate brought about by a given percentage change in income (given the elasticity).
The automatic increase in revenue brought about by increases in current income is often referred to as “fiscal drag” or “fiscal dividend.” The fiscal drag can be labeled an inflationary (or monetary) fiscal drag or a real fiscal drag, depending on whether it is brought about by income changes that reflect inflation or real growth. Indexation for price changes, as discussed in Chapters 2 and 3, will remove the inflationary fiscal drag but not the real fiscal drag. Therefore, if real growth is fast, the elasticity of the tax is high, and the average tax rate is substantial, the absolute increase in the tax rate brought about by real fiscal drag can be significant.
- Type
- Chapter
- Information
- Inflation and the Personal Income TaxAn International Perspective, pp. 97 - 106Publisher: Cambridge University PressPrint publication year: 1980