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1 Introductory concepts 2  Market mechanism  3 Elasticities  4 Market structures 5  Market failures  6  Macro economic activity/eco growth  7 Inflation 8  Employment & unemployment  9  External Stability  10  Income distribution 11.Factors affecting economy  12  Fiscal/Budgetary policy  13  Monetary Policy   14 Aggregate Supply Policies  15 The Policy Mix

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Fiscal drag or bracket creep

Fiscal drag, also referred to as 'bracket creep', occurs during times of inflation for countries with a progressive tax system.  When inflation occurs it results in a decrease in 'real wages' and workers seek to protect their 'real wage' by demanding increases in their nominal wage.  As nominal wages increase, it pushes some workers into higher marginal tax brackets.  This increases the 'average' rate of tax paid by these taxpayers, having two major effects:

Federal governments, both Labour and Liberal, have been fully aware of 'bracket creep' and have been happy to accept an automatic rise in the tax burden over time.  It therefore makes it easier for governments to make 'discretionary' tax cuts, such as the reductions in personal income tax rates that have occurred since the mid 2000s.  

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