Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/263518 
Year of Publication: 
2022
Series/Report no.: 
IZA Discussion Papers No. 15302
Publisher: 
Institute of Labor Economics (IZA), Bonn
Abstract: 
We examine the revenue and redistributive effects of tax policy reforms in twelve European countries over the decade between the financial crisis and the outbreak of the COVID-19 pandemic, setting them against the implications of a hypothetical system reflecting the extent of fiscal drag resulting from nominal wage increases. We show that the combination of wage growth and progressivity of the tax system determined the fiscal leeway which governments could use to reduce income inequality. Despite significantly faster wage growth in the examined post-communist countries of Central and Eastern Europe, their much lower degree of progressivity implied limited additional scope for fiscal changes. While decisions taken in most of the examined countries in the CEE region led to increases in tax progressivity, their income tax systems continue to be far less redistributive in comparison with such countries as Ireland, the Netherlands, or Portugal. This not only has direct implications for income inequality but also translates into limitations of automatic fiscal drag effects on government revenues, which could offer additional resources, in particular at a time of high inflation.
Subjects: 
income tax
tax reforms
fiscal drag
JEL: 
H24
D31
Document Type: 
Working Paper

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