Fiscal Drag - An Automatic Stabiliser?

Herwig Immervoll

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: Inflation can alter the structure of tax systems and lead to higher real tax burdens. The ‘automatic stabiliser’ argument assumes that increasing tax burdens reduce consumption and thereby aggregate demand, acting as an automatic stabiliser which helps to ‘cool down’ the economy in times of inflation. This argument, however, only looks at the demand side, ignoring any effects that higher tax burdens may have on the cost of production. If employees bear less then the full burden of higher taxes then real labour costs will also go up, generating a cost-push upwards pressure on prices and opening up the possibility of a wage-price spiral. I compute distributions of inflation induced changes of marginal and average effective tax rates for four European countries using a preliminary version of EUROMOD, a European tax-benefit model. Possible wage effects of these changes are then discussed in an imperfect labour market framework.

Date: 2000-12
Note: PE Msu
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

Downloads: (external link)
https://files.econ.cam.ac.uk/repec/cam/pdf/wp0025.pdf (application/pdf)

Related works:
Chapter: Fiscal Drag – An Automatic Stabiliser? (2006)
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:cam:camdae:0025

Access Statistics for this paper

More papers in Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge
Bibliographic data for series maintained by Jake Dyer ().