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Tax bracket creep and its effects on income distribution

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  • Heer, Burkhard
  • Süssmuth, Bernd

Abstract

We quantitatively analyze the way inflation alters the inequality of the income distribution in the U.S. economy. The main mechanism emphasized in this paper is the bracket creep effect according to which inflation pushes income into higher tax brackets. Governments adjust the nominal income tax brackets slowly and incompletely due to the rise in prices. In the U.S. postwar history, this typically happens less often than once every other tax year. In the first part of the paper, we study time series from the U.S. economy. As our central result we find that irrespective of the level of inflation more frequent income tax schedule adjustments make the relationship between inflation and income inequality more transitory in nature. In the second part of the paper, we develop a general equilibrium monetary model with income heterogeneity that is in line with our time series evidence. We find that a longer duration between two successive adjustments of the tax schedule reduces employment, savings, and output.

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  • Heer, Burkhard & Süssmuth, Bernd, 2013. "Tax bracket creep and its effects on income distribution," Working Papers 123, University of Leipzig, Faculty of Economics and Management Science.
    • Handle: RePEc:zbw:leiwps:123
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    Cited by:

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    2. Israel, Karl-Friedrich, 2017. "In the long run we are all unemployed?," The Quarterly Review of Economics and Finance, Elsevier, vol. 64(C), pages 67-81.
    3. Nordvik, Frode Martin, 2022. "Inflation news and the poor: The role of ethnic heterogeneity," World Development, Elsevier, vol. 151(C).
    4. Florian Dorn & Clemens Fuest & Björn Kauder & Luisa Lorenz & Martin Mosler & Potrafke. Niklas & Luisa Dörr, 2017. "Die Kalte Progression – Verteilungswirkungen eines Einkommensteuertarifs auf Rädern," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 70(03), pages 28-39, February.
    5. Keinsley, Andrew, 2016. "Indexing the income tax code, monetary/fiscal interaction, and the great moderation," European Economic Review, Elsevier, vol. 89(C), pages 1-20.
    6. Süssmuth, Bernd & Wieschemeyer, Matthias, 2017. "Progressive tax-like effects of inflation: Fact or myth? The U.S. post-war experience," IWH Discussion Papers 33/2017, Halle Institute for Economic Research (IWH).
    7. Chang Woon Nam & Christoph Zeiner, 2015. "Effects of Bracket Creep and Tax Reform on Average Personal Income Tax Burden in Germany," CESifo Working Paper Series 5626, CESifo.
    8. Wieschemeyer, Matthias & Süssmuth, Bernd, 2019. "Progressive tax-like effects of inflation: Fact or myth? The U.S. post-war experience," VfS Annual Conference 2019 (Leipzig): 30 Years after the Fall of the Berlin Wall - Democracy and Market Economy 203634, Verein für Socialpolitik / German Economic Association.
    9. Süssmuth, Bernd & Wieschemeyer, Matthias, 2022. "Taxation and the distributional impact of inflation: The U.S. post-war experience," Economic Modelling, Elsevier, vol. 111(C).
    10. Süssmuth, Bernd, 2019. "Bitcoin and Web Search Query Dynamics: Is the price driving the hype or is the hype driving the price?," VfS Annual Conference 2019 (Leipzig): 30 Years after the Fall of the Berlin Wall - Democracy and Market Economy 203566, Verein für Socialpolitik / German Economic Association.
    11. Flores Unzaga, Ismael Martin & Zhu, Junyi, 2014. "Bracket Creep Revisited: Progressivity and a Solution by Adjusting the Rich Tax in Germany," EconStor Preprints 100006, ZBW - Leibniz Information Centre for Economics.
    12. Bernd Süssmuth, 2022. "The mutual predictability of Bitcoin and web search dynamics," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 41(3), pages 435-454, April.

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    More about this item

    Keywords

    Bracket Creep; Progressive Income Taxation; Inflation; Income Distribution;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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