Non disponibile in italiano
Andreja Strojan Kastelec
- 9 October 2025
- WORKING PAPER SERIES - No. 3136Details
- 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 microsimulationapproach. 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.
- JEL Code
- D31 : Microeconomics→Distribution→Personal Income, Wealth, and Their Distributions
H24 : Public Economics→Taxation, Subsidies, and Revenue→Personal Income and Other Nonbusiness Taxes and Subsidies
E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy
- 3 August 2022
- OCCASIONAL PAPER SERIES - No. 299Details
- Abstract
- If the responses of wages – both private and public – and of pensions to an increase in inflation lead to second-round effects, this can make an inflationary shock more persistent, especially in the presence of automatic wage and pension indexation. This occasional paper presents an overview of the indexation schemes and other mechanisms for setting public wages and pensions across the euro area countries. It concludes that price indexation of public wages is relatively limited in the euro area, while public pensions are overwhelmingly automatically indexed, either fully or partially, to prices and wages.
- JEL Code
- E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy
J3 : Labor and Demographic Economics→Wages, Compensation, and Labor Costs
H55 : Public Economics→National Government Expenditures and Related Policies→Social Security and Public Pensions
E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation