Fiscal drag in theory and in practice: A European perspective

Esteban Garcia-Miralles, Maximilian Freier, Sara Riscado, Chrysa Leventi, Alberto Mazzon, Glenn Abela, Laura Boyd, Baiba Brusbarder, Marion Cochard, David Cornille, Emanuele Dicarlo (), Ian Debattista, Mar Delgado-Téllez, Mathias Dolls, Ludmila Fadejeva, Maria Flevotomou, Florian Henne, Alena Harrer-Bachleitner, Viktor Jaszberenyi-Kiraly, Max Lay, Laura Lehtonen, Mauro Mastrogiacom, Tara McIndoe-Calder, Mathias Moser, Martin Nevicky, Andreas Peichl, Myroslav Pidkuyko, Mojca Roter, Frédérique Savignac, Andreja Strojan Kastelec, Vaidotas Tuzikas, Nikos Ventouris and Lara Wemans
Additional contact information
Maximilian Freier: EUROPEAN CENTRAL BANK
Sara Riscado: OECD
Alberto Mazzon: EUROPEAN COMMISSION
Glenn Abela: CENTRAL BANK OF MALTA
Laura Boyd: CENTRAL BANK OF IRELAND
Baiba Brusbarder: LATVIJAS BANKA
Marion Cochard: BANQUE DE FRANCE
David Cornille: NATIONAL BANK OF BELGIUM
Ian Debattista: CENTRAL BANK OF MALTA
Mar Delgado-Téllez: BANCO DE ESPAÑA
Maria Flevotomou: BANK OF GREECE
Florian Henne: BANQUE CENTRALE DU LUXEMBOURG
Alena Harrer-Bachleitner: OFFICE OF THE AUSTRIAN FISCAL COUNCIL
Viktor Jaszberenyi-Kiraly: MAGYAR NEMZETI BANK
Laura Lehtonen: DE NEDERLANDSCHE BANK
Mauro Mastrogiacom: DE NEDERLANDSCHE BANK
Tara McIndoe-Calder: CENTRAL BANK OF IRELAND
Mathias Moser: OESTERREICHISCHE NATIONALBANK
Martin Nevicky: NATIONAL BANK OF SLOVAKIA
Myroslav Pidkuyko: BANCO DE ESPAÑA
Mojca Roter: BANKA SLOVENIJE
Andreja Strojan Kastelec: BANKA SLOVENIJE
Vaidotas Tuzikas: LIETUVOS BANKAS
Nikos Ventouris: BANK OF GREECE
Lara Wemans: BANCO DE PORTUGAL

No 2545, Working Papers from Banco de España

Abstract: This paper presents a comprehensive characterization of “fiscal drag” —the increase in tax revenue that occurs when nominal tax bases grow but nominal parameters of progressive tax legislation are not updated accordingly— across 21 European countries using a microsimulation approach. First, we estimate tax-to-base elasticities, showing that the progressivity built in each country’s personal income tax system induces elasticities around 1.7-2 for many countries, indicating a potential for large fiscal drag effects. We unpack these elasticities to show stark heterogeneity in their underlying mechanisms (tax brackets or tax deductions and credits), across income sources (labor, capital, self-employment and public benefits), and across the individual income distribution. Second, we extend the analysis beyond these elasticities to study fiscal drag in practice between 2019 and 2023, incorporating observed income growth and legislative changes. We quantify the actual impact of fiscal drag and the extent to which government policies have offset it, through either indexation or other reforms. Our results provide new insights into the fiscal and distributional effects of fiscal drag in Europe, as well as useful statistics for modeling public finances.

Keywords: personal income tax; inflation; indexation; bracket creep (search for similar items in EconPapers)
JEL-codes: D31 E62 H24 (search for similar items in EconPapers)
Pages: 58 pages
Date: 2025-11
New Economics Papers: this item is included in nep-eec and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.bde.es/f/webbe/SES/Secciones/Publicaci ... 25/Files/dt2545e.pdf First version, November 2025 (application/pdf)

Related works:
Working Paper: Fiscal Drag in Theory and in Practice: A European Perspective (2025)
Working Paper: Fiscal Drag in Theory and in Practice: a European Perspective (2025)
Working Paper: Fiscal drag in theory and in practice: a European perspective (2025)
Working Paper: Fiscal Drag in Theory and in Practice: a European Perspective (2025)
Working Paper: Fiscal drag in theory and practice: a European perspective (2025)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:2545

DOI: 10.53479/41507

Access Statistics for this paper

More papers in Working Papers from Banco de España Contact information at EDIRC.
Bibliographic data for series maintained by Ángel Rodríguez. Electronic Dissemination of Information Unit. Research Department. Banco de España ().