fiscal drag

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Related to fiscal drag: Contractionary fiscal policy

Fiscal Drag

Reduced activity in an economy as a result of a progressive tax system set up in such a way as to penalize extra earnings. For example, suppose a gross income more than $50,000 per year increases one's tax liability such that a person effectively earns less than he/she would have at $45,000 gross. A rational economic actor would therefore endeavor to lower his/her gross income. This in turn lowers spending and reduces the supply of money in an economy available to purchase goods and services. The diminished activity is called fiscal drag.

fiscal drag

the 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.

References in periodicals archive ?
The fiscal drag does look to be a temporary issue, meaning that volatility could present buying opportunities for investors with longer-term time horizons.
Yet, as the IFS points out, while fiscal drag may be the easy way for a Chancellor to lift more money off us, with the least political risk, it is not necessarily the best.
The Washington-based Institute of International Finance (IIF) expects the UAE's non-oil activity to pick up modestly in 2017 as fiscal drag eases and consumption spending rises in the second half of 2017, ahead of the introduction of value-added tax in 2018.
There's anecdotal evidence that many appointments to senior positions in several departments and government agencies have not yet been signed by the President (Rodrigo Duterte) as of September, which reinforces this fiscal drag,' Trinidad said.
Continued progress in reforms, lower fiscal drag, and stronger external demand, especially from the Euro area, are expected to support the recovery.
Chang said the government was highly likely to face fiscal drag in the fourth quarter due to shortfalls in tax revenue and the front loading of the budget in the first half of this year by 58.
In the United States, Fischer attributes the weakness of demand to housing, Europe and fiscal drag, and suggests that all these "headwinds" could be counteracted with better policies.
Together with a decline in fiscal drag for next year, this leads us to revise up Spain's growth outlook from +0.
Financial dictionary: Fiscal drag THIS can describe the way the amount of tax paid can increase when earnings rise during economic growth.
There are two major risks to the Japanese economic scenario: Will the LDP government be able to enact structural reforms to offset the fiscal drag of the consumption tax?
In an interview on CNBC on January 2, Dr Doom was more optimistic: "The advanced economies, benefiting from a half-decade of painful private-sector de-leveraging, a smaller fiscal drag, and maintenance of accommodative monetary policies, will grow.
Momentum in the US equity market can continue if companies see improved top-line growth as a result of pent-up demand, realization that interest rates will eventually rise, diminished fiscal drag and more balanced global growth.