Economics Fiscal Policy Questions
Fiscal drag refers to the phenomenon where an increase in a country's income leads to a decrease in government spending and an increase in tax revenue, resulting in a contractionary effect on the economy. This occurs when the government does not adjust tax brackets and thresholds to account for inflation or rising incomes. As a result, individuals are pushed into higher tax brackets, paying a larger proportion of their income in taxes. Additionally, as government spending remains constant, it represents a smaller percentage of the overall economy. Fiscal drag can lead to reduced consumer spending, lower economic growth, and decreased aggregate demand.