Progressive tax-like effects of inflation : fact or myth? : the U.S. post-war experience

Inflation and earnings growth can push some tax payers into higher brackets in the absence of inflation-indexed schedules. Moreover, inflation may affect the composition of individuals’ income sources. As a result, depending on the relative tax burden of labor and capital, inflation may decrease or increase the difference between before and after-tax income. However, whether some and if so which percentiles of the income distribution net benefit - and not only transitorily, from inflation via taxation is a widely unexplored question. We make use of a novel data set on U.S. pre-tax and post-tax income distribution series provided by Piketty et al. (2018) for the years 1962 to 2014 to answer this question for the post-war period. To this end, we estimate local projections to quantify dynamic effects. We find that inflation shocks increase progressivity of taxation not only contemporaneously but also with some repercussion of, at least, up to three years after the shock. While particularly the bottom two quintiles gain in share, it is not the top but the fourth quintile that lastingly loses through this phenomenon.