Bracket creep

The gradual movement into higher tax brackets when incomes increase as a result of inflation.

Bracket Creep

A situation in which inflation pushes people into higher tax brackets, resulting in a higher tax liability, even though the purchasing power of their income has not increased. When inflation is high, the dollar amounts of people's incomes goes up, but because prices for products also go up this does not correlate to an increase in purchasing power. However, because tax brackets are listed by dollar amounts, it may mean that the government is entitled to a greater share of one's disposable income. To avoid bracket creep, a legislature may link a tax bracket to inflation or change tax brackets every few years.

bracket creep

The movement of a taxpayer into higher tax brackets as his or her taxable income increases over time. Bracket creep occurs because of the progressive nature of the federal income tax structure, that is, extra income is taxed at higher and higher rates. As a result of bracket creep, more and more individuals seek tax-advantaged investments. Bracket creep was reduced significantly by 1986 tax reform, which reduced the number of tax brackets. Several additional brackets were added in the early 1990s.

Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.

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References in periodicals archive

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He contends that Iowa taxpayers are much better off today, especially since the state put an end to inflation-driven bracket creep and reformed tax laws to benefit elderly Iowans who live off annuities.

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The individual income tax share of GDP rose sharply in the 1979-1982 period when rapid inflation led to bracket creep that pushed up revenues, peaking at 9.4 percent of GDP in 1981.

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Inflation played a particularly important role by pushing taxpayers into higher tax brackets ("bracket creep"), pushing many poor households onto the tax role forthe first time, and reducing the value of business depreciation allowances.

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However, the initial deficits were also the consequence of the unexpected large decline in the inflation rate (which meant that revenues declined far more than expected because of the reduction in "bracket creep") and the equally unexpected serious decline in national production with the curbing of monetary growth.

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This in turn exacerbated another problem with the old tax system, bracket creep. Tax brackets weren't indexed for inflation, which meant that even average workers ended up paying punishingly high marginal rates.

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This "bracket creep" is scheduled to be eliminated in 1985; the economic Recovery Tax Act of 1981 provides for indexation of the individual income tax--automatic increases in personal exemptions and tax brackets in proportion to increases in a price index.

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Under the present income tax regime, Manuel said low-income earners are being affected by "bracket creep" phenomenon, whereas inflation is pushing income into higher tax brackets, resulting in an increase in income taxes but no increase in real purchasing power.

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