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on Public Finance |
| By: | Giovanni Cuttica (University of Ferrara, Ferrara, Italy); Luisa Loiacono (University of Ferrara, Ferrara, Italy, and London School of Economics Visiting Fellow, London, United Kingdom.); Leonzio Rizzo (University of Ferrara, Ferrara, Italy, and Institut d’Economia de Barcelona (IEB), University of Barcelona, Barcelona, Spain.); Riccardo Secomandi (University of Ferrara, Ferrara, Italy, and Institut d’Economia de Barcelona (IEB), University of Barcelona, Barcelona, Spain.) |
| Abstract: | This paper studies whether indexation of personal income tax parameters mitigates fiscal drag, focusing on the Average Income Tax Rate (AITR) on labor income. Using an OECD panel, we estimate the impact of the intensity of inflation on the AITR, differentiating by non-indexing and indexing systems. We show that indexation systematically changes the inflation-AITR relationship by weakening the pass through from inflation into average tax rates. We show that the increase in the Consumer Price Index from 2019 to 2024 is associated with a decrease in the average AITR of more than 1.75 percentage points due to indexing regimes and an increase of 1.18 percentage points due to non-indexing regimes. The differential impact of the indexation of the fiscal system implies a decrease of the inflation impact on AITR of 0.57 percentage points, which is about 3% of the mean of the AITR in 2019. This means that the average income tax, when the fiscal system is indexed to inflation, decreases following an increase in consumer prices: the purchasing power of wages, even when updated, usually declines after inflation, and we show that if the fiscal system is properly indexed, it will take this into account by decreasing taxes. |
| Keywords: | Fiscal drag; inflation shock; tax indexation |
| JEL: | H24 H21 E31 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:ipu:wpaper:123 |
| By: | Samuel Forbes |
| Abstract: | We analyse the UK income distribution from 2000 to 2023 using HMRC annual percentile data for both pre-tax and post-tax income. We fit a prefactor-adjusted $\kappa$-generalised specification to the data by weighted non-linear least squares and use inverse transform sampling to generate simulated income populations. The results suggest a redistribution of income shares over the period: the bottom 40\% appears to have increased its share, the middle-upper part of the distribution (50th--90th percentiles) lost share, the top 10\% remained broadly stable, and the top 1\% increased its share of pre-tax income. Because the modified specification is defined only above a positive threshold, conclusions concerning the lower tail should be interpreted with some caution. Using simulated 2023 pre-tax incomes to examine tax reform scenarios, we find that revenue-equivalent tax increases on high-income earners must be more than four times as large as comparable increases on lower-income earners. This suggests that, despite increased concentration at the top, the UK tax base remains driven primarily by the large number of taxpayers outside the very top of the distribution. |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2604.03025 |
| By: | Andreas Stoller; Martin Huber |
| Abstract: | We estimate the effect of cigarette price and tax increases on smoking rates using Eurobarometer survey data from 27 European Union countries between 2012 and 2020. Following a difference-in-differences approach, we compare individuals exposed to large price and tax increases with those in stable price and tax environments. Estimation is based on a difference-in-differences estimator with double machine learning, which relaxes the functional form assumptions typically imposed by parametric approaches such as two-way fixed effects. Our results indicate that tax increases reduce smoking rates among individuals who smoke at least once per month and among daily smokers. The reduction is primarily driven by individuals aged 15-24. We examine the sensitivity of our findings to functional form assumptions and treatment definitions. While estimates are robust to alternative functional form assumptions, they are sensitive to whether the treatment is defined as binary or continuous. |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2604.05841 |