ECB economists examined the heterogeneity of the tax burden from the “inflation tax”

The heterogeneity of the tax burden from the “inflation tax” is a topic that becomes socially dangerous during inflationary shocks. A recent study by economists at the ECB and a number of American universities shows a number of unusual consequences of the 2021-2022 European inflation outbreak. An increase in the number of such works may lead to the legalization of “non-standard tax policy” – the ideas of dynamic taxation of groups of individual taxpayers, which is what the authors call for.

A preprint of a paper by European Central Bank (ECB) economists Gonzalo Paz-Padro, Jüri Slaczalek and Oresto Tristani, Filippo Palotti of London’s UCL and Giovanni Violante of Princeton, published in the NBER, examines the heterogeneity for EU households of the 2021–2022 inflation surge due first to the pandemic COVID-19, then the Russian military operation in Ukraine and the associated rise in energy prices in the EU. The single euro area reduced the ability of eurozone countries to influence inflation with the key rate, and this explains the difference in the 2022 indicators in the literature – in France this is a 3% increase in the CPI over two years, in Italy – 20%. Nevertheless, the authors of the article “Who Pays for Inflation? Eurozone Households and the 2021–22 Inflation Shock” shows the differences in the impact of this inflationary outbreak across different age and income groups (unlike, for example, standard patterns of household income loss in a cyclical economic recession), even when inflation in the two countries was similar.

The main findings of Palotti et al are that the impact of the 2021–22 inflation surge on ECB household welfare was greater than during standard recessions and “non-shock” inflation surges. De facto, the authors argue based on a study of microdata in EU countries, what is happening has become a “tax on age”: due to differences in consumption baskets in different age groups, the maximum welfare losses from inflation were suffered by households of older age groups (45+), and half of the group Those aged 25–44 formally became “beneficiaries of inflation taxation”—their household wealth increased as a result of the inflationary episode. The burden of the “inflation tax” was peak in Italy and Spain, but in Germany and France the effect was invisible – there the impact of inflation on age groups was essentially the same. At the same time, contrary to standard theoretical assumptions, data for 2021–2022 show that in the eurozone, the average “inflationary” losses of households over two years across all income quintiles are equal—the role of the “stabilizer” was played by the stability of rents. The main contribution to the loss of welfare was made by the rise in energy prices in 2022 due to EU trade restrictions on gas imports from the Russian Federation, and not by post-pandemic inflation as such.

Researchers have studied in some detail the consequences of various “non-standard tax policy” measures in the euro area countries (targeted tax benefits for different categories of individual taxpayers, common during the pandemic) – their contribution to changes in the burden of “inflation tax” for different groups was not decisive, but in a number of countries, it softened the inevitable differentiation of household welfare (and the main determinant of stratification, the authors believe, became household debts and savings during this period).

Palotti and colleagues are obvious enthusiasts of such measures, which contradict the concept of a stable, predictable and, if possible, equal tax burden, and similar findings published by them may well play in favor of the spread, including on the recommendation of the ECB, not only of simple progressive personal income tax scales (they are standard for euro zone), but also more sophisticated “dynamic” systems of rates and deductions in taxation of different income, age and status groups – previously in the EU this was a monopoly of budget redistribution, but not taxation itself.

Dmitry Butrin