Bracket creeps: Bane or boon for the stability of numerical budget rules?

Martin Altemeyer-Bartscher and Goetz Zeddies

No 29/2016, IWH Discussion Papers from Halle Institute for Economic Research (IWH)

Abstract: As taxpayers typically pay low attention to a small inflation-induced bracket creep of the income tax, policy-makers tend to postpone its correction into the future. However, the fiscal illusion fades away and political pressure for a tax relief arises since after some years the cumulative increase of the average tax rate exceeds a critical threshold. Using Germany as an example, this paper shows that bracket creeps can provoke revenue cycles in public budgets hindering governments' compliance with the numerical budget rules. An indexation of the tax tariff could prevent such fluctuations and thus provides a favourable framework for the debt rule.

Keywords: progressive income taxes; bracket creep; political budget cycles; debt brake (search for similar items in EconPapers)
JEL-codes: H24 H31 H63 (search for similar items in EconPapers)
Date: 2017, Revised 2017
New Economics Papers: this item is included in nep-pbe
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:iwhdps:292016

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