Fiscal Drag

AAA

DEFINITION of 'Fiscal Drag '

Fiscal drag is an economics term referring to a situation where a government's net fiscal position (equal to its spending less any taxation) does not meet the net savings goals of the private economy. This can result in deflationary pressure attributed to either lack of state spending or to excess taxation.


One cause of fiscal drag is the consequence of expanding economies with progressive taxation. In general, individuals are forced into higher tax brackets as their income rises. The greater tax burden can lead to less consumer spending. For the individuals pushed into a higher tax bracket, the proportion of income as tax has increased, resulting in fiscal drag.

BREAKING DOWN 'Fiscal Drag '

Fiscal drag is essential a drag or damper on the economy caused by lack of spending or excessive taxation. As increased taxation slows the demand for goods and services, fiscal drag results. Fiscal drag is a natural economic stabilizer, however, since it tends to keep demand stable and the economy from overheating.


Because it is an economic stabilizer, fiscal drag can influence economic equality among citizens of the same region.

RELATED TERMS
  1. Taxation

    Taxation refers to the act of a taxing authority actually levying ...
  2. Microeconomics

    The branch of economics that analyzes the market behavior of ...
  3. Economics

    A social science that studies how individuals, governments, firms ...
  4. Progressive Tax

    A tax that takes a larger percentage from the income of high-income ...
  5. Macroeconomics

    The field of economics that studies the behavior of the aggregate ...
  6. Cost, Insurance and Freight - CIF

    A trade term requiring the seller to arrange for the carriage ...
Related Articles
  1. Taxes

    Do Tax Cuts Stimulate The Economy?

    Learn the logic behind the belief that reducing government income benefits everyone.
  2. Taxes

    A Concise History Of Changes In U.S. Tax Law

    We look at how U.S. taxes have changed since their inception.
  3. Taxes

    The History Of Taxes In The U.S.

    The number of taxes that we now consider a given did not always exist. Find out how they arose.
  4. Economics

    A Look at Greece’s Messy Fiscal Policy

    Investigate the muddy fiscal policy, tax problems, and inability to institute austerity that created the Greek crises in 2010 and 2015.
  5. Markets

    The Vodka Industry Keeps Growing, But Why?

    Understand what the vodka industry is and where it performs best. Learn about the growth of the industry and three reason why it continues to grow.
  6. Fundamental Analysis

    Is India the Next Emerging Markets Superstar?

    With a shift towards manufacturing and services, India could be the next emerging market superstar. Here, we provide a detailed breakdown of its GDP.
  7. Term

    What is the Macro Environment?

    The macro environment is the conditions existing in an economy as a whole, rather than in a single sector or region.
  8. Economics

    Puerto Rico Will Soon Become America's Greece

    Explore the similarities that exist between Puerto Rico in relation to the United States and Greece in relation to the European Union.
  9. Taxes

    What's Wrong with the American Tax System

    American's are highly taxed and we still run a deficit. We explain why.
  10. Economics

    Understanding the Bank Rate

    Bank rate is a term describing the interest rate a country’s central bank charges its domestic banks on loans it makes to them.
RELATED FAQS
  1. When has the United States run its largest trade deficits?

    In macroeconomics, balance of trade is one of the leading economic metrics that determines the trading relationship of a ... Read Full Answer >>
  2. Which is more important to a nation's economy, the balance of trade or the balance ...

    There is no question the composition of a country's balance of payments is more important than its balance of trade. This ... Read Full Answer >>
  3. What are the ethical arguments against government subsidies to companies like Tesla?

    The ethical argument behind government subsidies is that they should be put into place to help industries that will, in turn, ... Read Full Answer >>
  4. How can tariffs cause inefficiencies in domestic industries?

    Any government regulation naturally creates inefficiencies in a pure supply and demand marketplace. When it comes to the ... Read Full Answer >>
  5. How do changes in interest rates affect the spending habits in the economy?

    Changes in interest rates can have different effects on consumer spending habits depending on a number of factors, including ... Read Full Answer >>
  6. How autonomous are special administrative regions?

    When most people think of special administrative regions, or SARs, they are referring to Hong Kong and its relationship with ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Alligator Spread

    An unprofitable spread that occurs as a result of large commissions charged on the transaction, regardless of favorable market ...
  2. Tiger Cub Economies

    The four Southeast Asian economies of Indonesia, Malaysia, the Philippines and Thailand. Tiger cub economy indicates that ...
  3. Gorilla

    A company that dominates an industry without having a complete monopoly. A gorilla firm has large control of the pricing ...
  4. Elephants

    Slang for large institutions that have the funds to make high volumes trades. Due to the large volumes of stock that elephants ...
  5. Widow's Exemption

    In general terms, a widow's exemption refers to the amount that can be deducted from taxable income by a widow, thereby reducing ...
  6. Wedding Warrant

    A warrant that can only be exercised if the host asset, typically a bond or preferred stock, is surrendered. Until the call ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!