Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/173204
Authors: 
Süssmuth, Bernd
Wieschemeyer, Matthias
Year of Publication: 
2017
Series/Report no.: 
IWH Discussion Papers 33/2017
Abstract: 
Inflation and earnings growth can push some tax payers into higher brackets in the absence of inflation-indexed schedules. Moreover, inflation may affect the composition of individuals' income sources. As a result, depending on the relative tax burden of labour and capital, inflation may decrease or increase the difference between before-tax and after-tax income. However, whether some and if so which percentiles of the income distribution net benefit from inflation via taxation is a widely unexplored question. We make use of a novel dataset on U.S. pre-tax and post-tax income distribution series provided by Pike ty et al. (2018) for the years 1962 to 2014 to answer this question. To this end, we estimate local projections to quantify dynamic effects. We find that inflation shocks increase progressivity of taxation not only contemporaneously but also with some repercussion of several years after the shock. While particularly the bottom two quintiles gain in share, it is not the top but the fourth quintile that lastingly loses.
Subjects: 
bracket creep
progressive income taxation
inflation
income distribution
JEL: 
D31
E31
E44
E52
E62
Document Type: 
Working Paper

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