The practice of increasing or decreasing the income falling under various tax brackets to adjust for inflation. This is done to prevent (or at least reduce) bracket creep, which occurs when inflation pushes people into higher tax brackets, resulting in a higher tax liability, even though the purchasing power of their income has not increased. Bracket indexation reduces government revenue, but lessens arbitrary tax increases that could be harmful to the economy.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved