Cold Progression and its Effects on Income Distribution

41 Pages Posted: 12 Jun 2003

See all articles by Burkhard Heer

Burkhard Heer

University of Augsburg; CESifo (Center for Economic Studies and Ifo Institute)

Bernd Süssmuth

University of Leipzig; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: May 2003

Abstract

We present new empirical evidence for the US economy that inflation reduces the inequality of the earnings distribution. The main mechanism emphasized in this paper is the tax income bracket effect. Governments only adjust the nominal income tax brackets slowly to a rise in prices, typically less often than once every other year in the US post-war history. We also develop a theoretical general equilibrium monetary model with income heterogeneity. In this model, the effect of higher inflation on income distribution is shown to be rather small. However, we find that a longer duration between two successive adjustments of the income tax schedule reduces employment, savings, and output significantly.

Keywords: Cold Progression, Inflation, Income Distribution, Tax Income Brackets

JEL Classification: D31, E31, E44, E52

Suggested Citation

Heer, Burkhard and Süssmuth, Bernd, Cold Progression and its Effects on Income Distribution (May 2003). Available at SSRN: https://ssrn.com/abstract=414043

Burkhard Heer (Contact Author)

University of Augsburg ( email )

Universitätsstr. 2
Augsburg, 86159
Germany

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Bernd Süssmuth

University of Leipzig ( email )

IEW Institute for Empirical Research in Economics
Grimmaische Str. 12
Leipzig, D-04109
Germany
+49 341 97 33782 (Phone)
+49 341 97 33789 (Fax)

HOME PAGE: http://www.wifa.uni-leipzig.de/iew/professur-oekonometrie/team/prof-dr-bernd-suessmuth.html

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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