Taxation and the distributional impact of inflation: The U.S. post-war experience

Bernd Süssmuth and Matthias Wieschemeyer

Economic Modelling, 2022, vol. 111, issue C

Abstract: Due to a lack of adequate before and after tax time series, the impact of inflation on the income distribution in the presence of a progressive tax system is widely unexplored. Contributions using U.S. data have not reached a consensus about income inequality decreasing, increasing or showing no significant association with inflation. Our study analyzes the relationship across the distribution. We use a recently available dataset on U.S. income before and after taxation on a quintile-by-quintile basis for 1962–2016. We find inflation (i) before taxes to, if any, slightly decrease inequality, (ii) to amplify tax progressivity, and (iii) after taxes to reduce the Gini coefficient by 0.4 of a standard deviation in response to a one percentage point inflationary shock. We attribute (i) to the creditor-debtor channel. Findings (ii) and (iii) indicate missing or incomplete indexation redistributing particularly from the fourth quintile to the two bottom quintiles.

Keywords: Progressive income taxation; Inflation; Income distribution; Bracket creep (search for similar items in EconPapers)
JEL-codes: D31 E31 E44 E52 E62 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:111:y:2022:i:c:s0264999322000591

DOI: 10.1016/j.econmod.2022.105813

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