Template-Type: ReDIF-Paper 1.0
Author-Name: Esteban Garcia-Miralles
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Author-X-Name-Last: Garcia-Miralles
Author-Workplace-Name: Banco de Espana
Author-Name: Maximilian Freier
Author-X-Name-First: Maximilian
Author-X-Name-Last: Freier
Author-Workplace-Name: European Central Bank
Author-Name: Sara Riscado
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Author-Workplace-Name: OECD 
Author-Name: Chrysa Leventi
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Author-Workplace-Name: European Commission
Author-Name: Alberto Mazzon
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Author-Name: Glenn Abela
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Author-Workplace-Name: Central Bank of Malta
Author-Name: Laura Boyd
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Author-X-Name-Last: Boyd
Author-Workplace-Name: Central Bank of Ireland
Author-Name: Baiba Brusbarde
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Author-Workplace-Name: Latvijas Banka
Author-Name: Marion Cochard
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Author-Workplace-Name: Banque de France
Author-Name: David Cornille
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Author-Workplace-Name: National Bank of Belgium
Author-Name: Emanuele Dicarlo
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Author-Name: Ian Debattista
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Author-Name: Mar Delgado-Tellez
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Author-Name: Mathias Dolls
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Author-Workplace-Name: ifo Institute
Author-Name: Ludmila Fadejeva
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Author-Name: Maria Flevotomou
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Author-Name: Florian Henne
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Author-Name: Alena Harrer-Bachleitner
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Author-Name: Viktor Jaszberenyi-Kiraly
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Author-Workplace-Name: Magyar Nemzeti Bank
Author-Name: Max Lay
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Author-Name: Laura Lehtonen
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Author-Name: Mauro Mastrogiacomo
Author-X-Name-First: Mauro
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Author-Name: Tara McIndoe-Calder
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Author-Workplace-Name: Central Bank of Ireland
Author-Name: Mathias Moser
Author-X-Name-First: Mathias
Author-X-Name-Last: Moser
Author-Workplace-Name: Oesterreichische Nationalbank
Author-Name: Martin Nevicky
Author-X-Name-First: Martin
Author-X-Name-Last: Nevicky
Author-Workplace-Name: National Bank of Slovakia
Author-Name: Andreas Peichl
Author-X-Name-First: Andreas
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Author-Workplace-Name: ifo Institute
Author-Name: Myroslav Pidkuyko
Author-X-Name-First: Myroslav
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Author-Workplace-Name: Banco de Espana
Author-Name: Mojca Roter
Author-X-Name-First: Mojca
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Author-Workplace-Name: Banka Slovenije
Author-Name: Frederique Savignac
Author-X-Name-First: Frederique
Author-X-Name-Last: Savignac
Author-Workplace-Name: Banque de France
Author-Name: Andreja Strojan Kastelec
Author-X-Name-First: Andreja
Author-X-Name-Last: Strojan Kastelec
Author-Workplace-Name: Banka Slovenije
Author-Name: Vaidotas Tuzikas
Author-X-Name-First: Vaidotas
Author-X-Name-Last: Tuzikas
Author-Workplace-Name: Lietuvos bankas
Author-Name: Nikos Ventouris
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Author-Name: Lara Wemans
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Title: Fiscal Drag in Theory and in Practice: a European Perspective
Abstract: This paper presents a comprehensive characterization of "fiscal drag" - the increase in tax revenue that occurs when nominal tax bases grow but nominal parameters of progressive tax legislation are not updated accordingly - across 21 European countries using a microsimulation approach. First, we estimate tax-to-base elasticities, showing that the progressivity built in each country's personal income tax system induces elasticities around 1.7-2 for many countries, indicating a potential for large fiscal drag effects. We unpack these elasticities to show stark heterogeneity in their underlying mechanisms (tax brackets or tax deductions and credits), across income sources (labor, capital, self-employment, public benefits), and across the individual income distribution. Second, we extend the analysis beyond these elasticities to study fiscal drag in practice between 2019 and 2023, incorporating observed income growth and legislative changes. We quantify the actual impact of fiscal drag and the extent to which government policies have offset it, either through indexation or other reforms. Our results provide new insights into the fiscal and distributional effects of fiscal drag in Europe, as well as useful statistics for modeling public finances.
Creation-Date: 2025-10-14
File-URL: https://datnes.latvijasbanka.lv/papers/WP_7_2025.pdf
File-Format: Application/pdf
Number: 2025/07
Classification-JEL: D31, H24, E62
Keywords: personal income tax, inflation, indexation, bracket creep
Handle: RePEc:ltv:wpaper:202507