Speaker: Junyi Zhu, Professor,ResearchCenterDeutsche Bundesbank
Host: Geng Niu, Associate professor, RIEM
Time: 11:00--12:00, April 24, Friday
Venue: TongboBuilding201, Liulin Campus
Abstract: Using the German income distribution in 2009 as a case study, this paper studies the redistributive and revenue effects of bracket creep under various inflation scenarios. We develop a tax micro-simulation model for the newly available Panel on Household Finance (PHF) data. The simulation yields an inverted U-shaped overall redistributive effect of the tax system with respect to the inflation rate, which contrasts with Immervoll (2005) who finds that fiscal drag always enhances the equalising property. The nominal income growth as well as the deterioration of tax progression in the middle and top of the income distribution between 1998 and 2009 can be the impetus for this change. This result suggests that delaying indexation might not always mean that the tax system is more redistributive. We also argue that these results might be generalized to the other countries under the observed widening market income inequality. Additionally, when we introduce the empirical fact that capital income grows faster than non-capital incomes, the flat rate capital income tax implemented since 2009 further disequalize the after-tax income compared to zero impact on the counterpart in 1998. Nevertheless, under reasonable assumptions, reducing the gap of the growth rates between capital and non-capital incomes or even reverse their relationship can surprisingly worsen the redistributive effect.
