Fiscal drag refers to the process by which an increase in inflation or economic growth causes individuals and businesses to be pushed into higher tax brackets, resulting in increased tax revenue for the government.
This happens when the government does not adjust tax brackets or exemptions in line with inflation or economic growth, causing a larger portion of income to be subject to taxation. Fiscal drag can also occur when the government raises tax rates or reduces deductions and credits.
The effect is that individuals and businesses pay more in taxes without a corresponding increase in their real income. The term "fiscal drag" is used to describe this phenomenon because it is as if the government is "dragging" more revenue out of the economy.