From the Centre for Economic Policy Research (CEPR), new work on how European tax systems responded to post-pandemic inflation. Relevant in the United States, including in the context of a revival of political rhetoric around basis indexing and the indexing of tax expenditures.
A post on CEPR’s VoxEU blog, as well as the underlying paper, below the fold.
Mathias Dolls, Maximilian Freier, Esteban García-Miralles, Alberto Mazzon & Sara Riscado, Fiscal Drag in Europe: How Inflation Is Quietly Affecting Public Revenue, VoxEU (Mar. 2, 2026):
The 2022 inflationary spike in Europe has brought renewed interest in fiscal drag. Using harmonised microdata for 21 European countries, this column documents that the progressivity of personal income tax systems gives rise to large tax‑to‑base elasticities, implying substantial potential for fiscal drag if parameters are not adjusted. These effects are more prevalent for labour income and for taxpayers at the bottom and middle of the income distribution. Furthermore, it documents very heterogeneous policy responses across countries over 2019–2023, ranging from incomplete offsetting to over‑compensation of potential fiscal drag.
Esteban García-Miralles et al. [32 total co-authors], Fiscal Drag in Theory and in Practice: A European Perspective, 185 Eur. Econ. Rev. 105274 (May 2026):
This paper presents a comprehensive characterization of “fiscal drag”—the increase in tax revenue that occurs when nominal tax bases grow but nominal parameters of progressive tax legislation are not updated accordingly—across 21 European countries using a microsimulation approach. First, we estimate tax-to-base elasticities, showing that the progressivity built in each country’s personal income tax system induces elasticities around 1.7–2 for many countries, indicating a potential for large fiscal drag effects. We unpack these elasticities to show stark heterogeneity in their underlying mechanisms (tax brackets or tax deductions and credits), across income sources (labor, capital, self-employment, public benefits), and across the individual income distribution. Second, we extend the analysis beyond these elasticities to study fiscal drag in practice between 2019 and 2023, incorporating observed income growth and legislative changes. We quantify the actual impact of fiscal drag and the extent to which government policies have offset it, either through indexation or other reforms. Our results provide new insights into the fiscal and distributional effects of fiscal drag in Europe, as well as useful statistics for modeling public finances.
