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 ?
I would expect if there were less fiscal drag, and I hope there will be less going forward, that the economy's growth rate is going to tick up," Yellen said on November 14 as she addressed senators considering her candidacy to replace Ben S.
The EU region's equities could be poised for an intermediate breakout if fiscal drag continues to dissipate and growth rates accelerate.
Within this total, taxes on income have risen by 2 per cent of GDP as a consequence of a range of tax measures as well as the effects of fiscal drag.
However, the delays usually encountered in enacting such legislation together with the subsequent lags before much of the effects were felt in the economy implied continued fiscal drag during the quarters immediately ahead; moreover, the propensity for financial markets to raise interest rates in anticipation of fiscal policy stimulus might also damp spending for some period.
We expect capital markets revenue trends to remain volatile over coming quarters, with global market risks persisting in the face of significant macro headwinds, growing concerns over fiscal drag in the U.
The United States will lead this acceleration, aided by diminishing fiscal drag, accommodative monetary policy and stronger household balance sheets.
Waning Fiscal Drag and Easing Policy Concerns Expected to Boost Economic Growth this Year
In a macro sense, accelerating growth in China and the US is bullish for Asian equities, though fiscal drag in Washington, the Politburo's crackdown on property speculation and Italy/Cyprus event risk on European growth all have the potential to cash dark (if fleeting) clouds on the sunshine scenario.
Any sharp deterioration in the unemployment picture, potentially linked to fiscal drag and the forthcoming debate over deficit reduction, could accelerate the turn in asset quality performance and hinder profitability for card issuers next year, although a dramatic change is not anticipated given reduced consumer leverage levels and tighter underwriting criteria.
An improving economy, receding fiscal drag and an accommodative monetary policy should support further gains in stocks though gains will most likely be nowhere close to last year's.
This fiscal drag or failure to update thresholds in line with inflation means overtime more and more families will have to pay the 40 percent tax.
5% of gross domestic product (GDP), which is in addition to the previous fiscal drag of roughly 1.