Legal Journals

Fiscal Drag Creates Uneven Tax Burden

By rpark

A new OECD study investigated 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, ironically, after experiencing increases in real income. The latter scenario played out in several upper-middle income OECD countries that experienced high growth rates in full-time earnings, such as Greece, Hungary, South Korea, Portugal and Turkey. Despite concerted legislative efforts to ease tax burdens, such high growth in earnings ? in many cases more than 40% ? pushed enough workers into a higher income bracket to create fiscal drag.

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Full post as published by Harvard International Law Journal Digest on March 21, 2008 (boomark / email).