fiscal drag(redirected from Real fiscal drag)
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fiscal dragthe restraining effect of PROGRESSIVE TAXATION on economic expansion. As NATIONAL INCOME rises, people move from lower to higher tax brackets, thereby increasing government TAXATION receipts. The increase in taxation constitutes a ‘leakage’ (from the CIRCULAR FLOW OF NATIONAL INCOME) that will reduce the rate of expansion of AGGREGATE DEMAND below that which would otherwise be the case. Governments may choose as part of FISCAL POLICY to adjust for the effects of fiscal drag by regularly increasing personal tax allowances.
Fiscal drag can also serve to automatically constrain the effect of the pressure of INFLATION in the economy, for with a high rate of inflation people will tend to move into higher tax brackets, thereby increasing their total taxation payments, decreasing their disposal income and reducing aggregate demand. This has the effect of reducing the pressure of DEMAND-PULL INFLATION. See AUTOMATIC ( BUILT-IN) STABILIZERS.