1. What is Fiscal Drag?

Fiscal drag refers to the additional tax burden that occurs when tax brackets are not adjusted for inflation, causing taxpayers to pay a higher percentage of their income in taxes even though their real purchasing power hasn't increased.

2. How Does the Calculator Work?

The calculator uses the Fiscal Drag formula:

Where:

• \( \text{Inflation} \) — Current inflation rate (%)
• \( \text{Adjustment} \) — Tax bracket adjustment rate (%)
• \( \text{Income} \) — Taxable income (currency)

Explanation: The formula calculates the additional tax burden when tax brackets aren't fully adjusted for inflation, pushing taxpayers into higher tax brackets.

3. Importance of Fiscal Drag Calculation

Details: Understanding fiscal drag helps policymakers and taxpayers recognize hidden tax increases and make informed decisions about tax policy and personal financial planning.

4. Using the Calculator

Tips: Enter the current inflation rate, the tax bracket adjustment rate (if any), and your taxable income. All values must be valid positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What causes fiscal drag?
A: Fiscal drag occurs when tax brackets aren't adjusted for inflation, pushing taxpayers into higher tax brackets even though their real income hasn't increased.

Q2: How can governments prevent fiscal drag?
A: Governments can implement automatic inflation adjustments to tax brackets, known as indexing, to prevent fiscal drag.

Q3: Does fiscal drag affect all taxpayers equally?
A: No, fiscal drag typically affects middle-income earners more significantly as they're more likely to be near tax bracket thresholds.

Q4: Is fiscal drag always negative?
A: While it increases tax burden for individuals, governments may view it positively as it increases tax revenue without officially raising tax rates.

Q5: How often should tax brackets be adjusted?
A: Ideally, tax brackets should be adjusted annually to match inflation rates and prevent fiscal drag from occurring.