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Fiscal Drag

Fiscal drag is a phenomenon that occurs when inflation pushes taxpayers into higher income tax brackets, resulting in higher tax payments. Fiscal drag can occur because most tax systems use fixed income brackets, which means that as a taxpayer's income increases due to inflation, a larger portion of their income may be subject to higher tax rates. This can lead to an increase in tax revenue for the government, even if tax rates have not been changed.

Fiscal drag can be seen as a form of stealth taxation, as it can result in higher tax payments without the need for explicit tax rate increases.

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