Fiscal Drag
Categories: Tax
Keynes was all about avoiding fiscal drags. A fiscal drag is what happens to the economy when people stop spending. This could be because of an increase in taxes, or other reasons. For instance, if wages and inflation go up but tax brackets are unchanged, then lower earners get dragged into higher tax brackets, lowering their buying power and creating fiscal drag.
When the demand for buying things and spending money slows, the economy slows, and we get our fiscal drag.
While the fiscal drag sounds bad, it’s not all that bad. If taxes are raised at the right time, a fiscal drag can be a good thing, slowing the economy and stabilizing it. If one end of the extreme is a fiscal drag, the other end is full of market bubbles just waiting to pop. If the market is a little too happy, a fiscal drag can bring it back down to earth.