Fiscal drag occurs when inflation pushes taxpayers into higher tax brackets, causing:
Correct answer: A. A rise in average tax payments without real income growth
- A. A rise in average tax payments without real income growth
- B. A fall in government revenue despite higher nominal wages
- C. A reduction in tax rates for households with rising incomes
- D. An increase in public borrowing caused by lower interest rates
Explanation
Fiscal drag occurs when nominal incomes rise with inflation and taxpayers move into higher tax brackets. Their real purchasing power may not increase, but their tax burden can still rise.
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About Public Finance
Government revenue and expenditure are analysed through taxation, public borrowing, budgets, subsidies, transfers and public debt. The topic explains how fiscal policy affects resource allocation, income distribution, economic stability and growth, while distinguishing direct from indirect taxes, progressive from regressive taxation, and public goods from goods supplied by private markets.
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