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For example, suppose a person earns $20 000 per year and is liable to 20% tax on earnings above a threshold of $5 000 per year. Then they pay (20000-5000)*0.2 = $3000 in tax, or 15% of income. Now suppose that due to inflation, their wage goes up by 5%, but the government only increases the tax threshold by 2%. They must now pay (21000-5100)*0.2 = $3180 or 15.14%. The proportion of income as tax has increased - this is fiscal drag.

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Topics: Fiscal Drag Tax Threshold Increased Suppose Year Income Pay...

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Fiscal yearA fiscal year or financial year is a 12-month period used for calculating annual ("yearly") financial reports in businesses and other organizations. In many jurisdictions, regulatory laws regarding accounting require such reports once per twelve months, b Fiscal policyFiscal Policy is the economic term which describes the behaviour of governments in raising money to fund current spending and investment for collective social purposes and for transfer payments to citizens and residents of the territory for which the gove Fiscal neutralityFiscal neutrality is a term referring to the impact of taxation on the economy. When it is said that fiscal neutrality is desirable, the meaning is that the tax measure or policy should not introduce undesirable distortions into the normal working of the Fiscal federalismFiscal federalism is the system of transfers ( grants) by which the US Federal government shares its revenues with state and local governments. Fiscal dragFiscal drag refers to the increase in tax revenue caused when the threshold of a tax is not increased in line with inflation. For example, suppose a person earns $20 000 per year and is liable to 20% tax on earnings above a threshold of $5 000 per year. Fiscal imbalanceFiscal imbalance (in French desequilibre fiscal is the term used in Quebec and Canada to describe a monetary imbalance between the Canadian federal government and the Quebec and provincial governments. Description According to the fiscal imbalance theory,