The impact of inflation on income tax and social insurance contributions in Europe

Inflation can alter the characteristics of tax- and contribution systems in numerous ways. This paper demonstrates how inflation alters the distributive properties of nominally defined tax systems and looks at the impact of the tax revenues and social insurance contribution receipts generated. It provides quantitative estimates for Germany, The Netherlands and the UK, using a preliminary version of EUROMOD, a European tax-benefit microsimulation model. The integrated framework provided by the model permits the use of common income concepts across countries and therefore enables one to make informative comparisons of the distributive consequences of the inflation induced erosion of tax-band limits, thresholds, deductions, tax credits, etc. The paper also tests the performance of automatic indexing regimes used in two of the countries.