Bracket creep

Bracket Creep is an economic term that refers to the process by which inflation pushes income into higher tax brackets. The result is an increase in income taxes but no increase in real purchasing power. This phenomenon is also known as "fiscal drag."

Overview

Bracket creep occurs when inflation rises, leading to an increase in salaries and wages. However, if the tax brackets are not adjusted for this inflation, more individuals and households find themselves in higher tax brackets, even though their purchasing power has not increased. This results in an increase in income taxes paid to the government, but no real increase in wealth for the individual or household.

Causes

The primary cause of bracket creep is inflation. Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. When inflation rises, so do salaries and wages to keep up with the cost of living. However, if the tax brackets are not adjusted for this inflation, individuals and households may find themselves in higher tax brackets, paying more in taxes but not seeing an increase in their real wealth.

Effects

The effects of bracket creep can be significant. For individuals and households, it can mean paying more in taxes without seeing an increase in real wealth. For the government, it can mean an increase in tax revenue. However, this can lead to distortions in the economy and can be seen as a form of "stealth tax" that is not immediately apparent to taxpayers.

Solutions

One solution to bracket creep is to index tax brackets to inflation. This means adjusting the tax brackets each year in line with inflation, so that individuals and households do not find themselves in higher tax brackets simply because of inflation. Many countries, including the United States, already do this.

See also

• Inflation
• Tax bracket
• Fiscal drag