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Inflation And Income Tax Bracket

A certain amount of inflation is a necessity in a capitalistic economy.  The upside of a small amount of inflation is that it reduces the real amount of debt one owes, causes some investments such as real estate to increase in value and makes workers feel better because it helps their wages to increase over time.  The downside of inflation is that it can devastate the real value of savings and the real amount of income of those on fixed incomes such as retirees.

Another downside of inflation is that it causes wage earners incomes to creep into higher tax brackets.  Income tax rates are generally structured so that the more one makes the higher the tax bracket.  However, tax brackets are not adjusted for inflation and this causes wage earners more in taxes over time.

As an example, a worker making, say, $50.000 per year may find himself in a 20% tax bracket.  In several years, inflation may have increased the worker's cost of living by 20% or more, so he needs to be making $60,000 just to stay even.  The way Congress structures income tax brackets, they don't change over time for inflation.  So, the worker, by earning $10,000 more per year, may now be in the 25% tax bracket, yet his wages buys him no more than it did when he was making $50,000.  In effect, the government has increased the workers taxes just through inflation.

Congress knows inflation will push people into higher tax brackets over time and will cause increased tax rates on the median income.  That's one reason they like the the Federal Reserve to allow some inflation to exist in the economy and only reign in growth in the face of hyper inflation.

 

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Chained CPI Hits Social Security Through Taxation Of Benefits FedSmith.com
FedSmith.com Chained CPI Hits Social Security Through Taxation of Benefits FedSmith.com Every year, the IRS adjusts the mechanics of the tax code to prevent people from rising into higher tax brackets as a result of inflation rather than an increase in actual income. The tax reform package passed last year slows these adjustments for and more raquo

The Turnbull Government Says Its Tax Plan Deals With Bracket Creep. Does It ...
The Guardian The Turnbull government says its tax plan deals with bracket creep. Does it The Guardian You may notice bracket creep when your salary happens to rise so much that the pointy end of your income pushes into a higher tax bracket thanks to a promotion or a better paying job, but it also occurs when you receive a small pay increase that

Hawke And Keating, Secret Neoliberals The Australian Financial Review
The Australian Financial Review Hawke and Keating, secret neo liberals The Australian Financial Review While analyses of inflation and bracket creep might lead their authors to conclude the Turnbull government39s income tax cuts are fair, they will struggle as long as public perceptions of big business and the top echelons of society remain so jaundiced.

Is The New Tax Law A Good Or Bad Thing Military.com
Military.com Is the New Tax Law a Good or Bad Thing Military.com New inflation measurement. The new chained measure of inflation used under the new law will result in slower growth of income levels within the tax brackets. Over time, this will mean you39ll pay more taxes than you would have under the old inflation

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Facts of Law about consumer inflation

Facts of Law - Inflation