Definition of Fiscal drag:
Automatic restraint applied to a fast expanding economy under a progressive tax system. As incomes rise, individuals are pushed into higher income tax brackets, and average tax obligations increase that dampen spending. See also automatic fiscal stabilizers.
Fiscal drag is essentially a slowing in the growth of the economy caused by a lack of spending as increased taxation slows the demand for goods and services. When an economy is rapidly expanding, inflation results in higher income and therefore individuals moving into higher tax brackets and paying more of their income in taxes. This is particularly the case in economies with progressive taxes, or tax brackets, which stipulate that the higher income an individual makes the higher the tax they pay and thus they move into a higher tax bracket.
Fiscal drag is an economic term whereby inflation or income growth moves taxpayers into higher tax brackets. This in effect increases government tax revenue without actually increasing tax rates. The increase in taxes reduces aggregate demand and consumer spending from taxpayers as a larger share of their income now goes to taxes, which leads to deflationary policies, or drag, on the economy.
The deflationary effect of a progressive taxation system on a countrys economy. As wages rise, a higher proportion of income is paid in tax.
How to use Fiscal drag in a sentence?
- Progressive taxation, whereby individuals are moved into higher tax brackets because of inflation or increased income, is a fiscal policy that results in fiscal drag.
- Fiscal drag is a result of decreased consumer spending as a result of increased taxation that eventually reduces aggregate demand, which leads to deflationary pressures.
- It has raised taxes so that an extra $1.5 billion will be paid this year just as a result of people moving into higher income tax brackets through fiscal drag.
- Progressive taxation allows for increased government taxation without actually increasing taxes.
- Fiscal drag can be seen as an automatic fiscal stabilizer as it controls a rapidly expanding economy from overheating.
Meaning of Fiscal drag & Fiscal drag Definition