Hidden tax increases - the extra tax burden of the bracket creep and the expected impact of income tax rates "on wheels" on tax reliefs

Clemens Fuest, Björn Kauder, Luisa Lorenz, Martin Mosler (), Niklas Potrafke and Florian Dorn
Authors registered in the RePEc Author Service: Luisa Dörr

in ifo Forschungsberichte from ifo Institute - Leibniz Institute for Economic Research at the University of Munich

Abstract: • Bracket creep is weakening the distribution effects of the taxation system and leading to a rise in the tax ratio that is beyond democratic control. The elimination of bracket creep is therefore advisable. • The public debate mostly focuses on bracket creep in the narrower sense of the term, which only takes into account the effect of rising prices. This bracket creep in the narrow sense of the term alone led to additional tax revenues of 33.5 billion euros from 2011 to 2016. If the effect of rising real wages (bracket creep in the larger sense of the term) is also taken into consideration, the additional tax revenues during this period total 70.1 billion euros. • The impact of the burden caused by bracket creep is not equally distributed among income tax payers. Income tax payers in the low and medium income tax brackets are particularly negatively affected by bracket creep. • Bracket creep in the narrower sense of the term will lead to an increase in income tax revenues of a total of 314.9 billion euros during the period of 2017 to 2030. If the tax ratio is to be kept constant, or if bracket creep is considered in the wider sense of the term, cumulative "hidden" additional tax revenues will be as high as 433.6 billion euros. • A "rolling rate" is proposed whereby a tax rate parameter and creep areas are coupled with inflation and growth in real income (bracket creep in the broader sense), in order to keep the tax ratio constant ceteris paribus. • State revenues continue to grow even with a "rolling rate": even if bracket creep in the wider sense is taken into account, public income continues to rise in line with growth in price levels and real wages.

JEL-codes: D30 H21 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

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