Debt Brake Will Intensify Bracket Creep Problem

As taxpayers typically pay relatively little attention to low levels of inflation induced income tax bracket creep, policy makers tend to regularly postpone correction of this problem. Eventually, however, the fiscal illusion fades away, and political pressure for tax relief arises once the cumulative increase of the average tax rate exceeds a critical threshold. Using Germany as an example, it is shown that bracket creep can provoke revenue cycles in public budgets that hinder governments’ compliance with the numerical budget rules. An indexation of the tax tariff, which would provide an automatic correction for bracket creep, could prevent such fluctuations and thus provide a favourable framework for the debt brake.

27. February 2017

Authors Martin Altemeyer-Bartscher Götz Zeddies

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