economics hard Fill in the Blank

The phenomenon where inflation pushes taxpayers into higher income tax brackets, resulting in an increase in their tax burden without any actual increase in their real purchasing power, is technically known as ___.

  1. countervailing
  2. Net Factor Income from Abroad (NFIA)
  3. dumping
  4. bracket creep (or fiscal drag)

Answer: bracket creep (or fiscal drag)

Bracket creep is a hidden consequence of progressive taxation in an inflationary environment. If tax brackets are not indexed to inflation, nominal wage increases that merely match the inflation rate will push workers into higher marginal tax tiers. This stealthily increases the government's tax revenue while reducing the taxpayer's real disposable income, acting as an automatic, unlegislated tax hike.

Topic Public Finance - Concepts
Exam Relevance UPSC Prelims, SSC CGL