Fiscal Drag and Its Policy Implications

서지정보

· 발행기관 : 한국제도∙경제학회
· 수록지 정보 : 제도와 경제 / 6권 / 2호 / 385 ~ 423페이지
· 저자명 : 이성규

초록

Fiscal drag refers to the effect that inflation has on average tax rates. If tax allowances are not increased in line with inflation, and taxpayers’ incomes increase with inflation, then they will be moved up into higher tax bands and so their tax bill will go up. In other words, fiscal drag refers to the increase in tax revenue caused when the threshold of a tax is not increased in line with either inflation or earnings growth.
In general, fiscal drag refers to the process where tax thresholds are either not adjusted for inflation (nominal fiscal drag), or fail to keep pace with earnings growth (real fiscal drag), causing in either case an automatic rise in tax revenues. For instance, in a progressive tax system, a rise in inflation will cause wage earners to pay a higher proportion of their income in tax, even though their real wages are unchanged; this is nominal fiscal drag. On the other hands, real fiscal drag occurs when all taxpayers pay a higher proportion of their income in taxation, as a result of rising real wages. In these circumstances, there is a rise in government tax revenues as a proportion of gross domestic product.
Fiscal drag creates uneven tax burden. Recently, OECD (2007) investigates the interaction between income, inflation and tax obligations in OECD countries. Notably, workers in several countries saw their nominal tax burden rise in response to high earnings growth. This phenomenon, known as “fiscal drag”, occurs in countries where tax rates increase as nominal taxable income rises. Workers are thus forced to pay higher taxes due to inflation or after experiencing increases in real income. Despite concerted legislative efforts to ease tax burdens, such high growth in earnings in many countries pushed enough workers into a higher income bracket to create ‘fiscal drag’. At present, the personal income tax thresholds in Korea are not indexed both to inflation and earnings growth. Thus, the tax rate schedule must be indexed in order to offset fiscal drag.

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