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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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The Tax Lawaposs New Way Of Measuring Inflation Could Take A Toll On Taxpayer...
NPR The Tax Law39s New Way Of Measuring Inflation Could Take A Toll On Taxpayers NPR A little remarked upon provision changing the way inflation is calculated is among the big changes contained in the tax overhaul signed by President Trump last week. The new method, using the so called quotchainedquot consumer price index to determine when Trump39s New Inflation Measure May Push Many Into Higher Tax BracketNewsmax Measurement Tool Used In New Tax Bill Will Impact Deductions And BracketsWUWM NPR thinks it39s found a way the tax cut raises your taxes. It39s wrong.Canada Free Press Bureau of Labor Statistics Joint Committee on Taxation Brookings Institution all 8 news articles raquo

How Chained Inflation Will Erode The New Tax Cuts Kiplinger Kiplingeraposs ...
How Chained Inflation Will Erode the New Tax Cuts Kiplinger Kiplingeraposs Personal Finance It will result in lower inflation adjustments, so there will be smaller annual increases in tax brackets, standard deductions and other breaks. and more raquo

Bracket Creep Seeking Alpha
Seeking Alpha Bracket Creep Seeking Alpha Bracket creep describes the process by which inflation pushes wages and salaries into higher tax brackets, leading to a fiscal drag situation. Given most progressive tax systems are not adjusted for inflation, as wages and salaries rise in nominal

The Big, Permanent Tax Increase Inside The Tax Cut Act Bloomberg
Bloomberg The Big, Permanent Tax Increase Inside the Tax Cut Act Bloomberg substitutesquot and concluded that quotCongress and the President must decide whether they wish to continue the widespread overindexing of various federal spending programs and features of the tax code.quot In response, in August 2002, the BLS began and more raquo

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Facts of Law about consumer inflation

Facts of Law - Inflation