What is a Bracket Creep?
How Does a Bracket Creep Work?
Let's say John Doe makes $100,000 a year and is in the 28% income that is $102,000 and higher.bracket. Let's further assume that the is 30% for
John is in the 28% tax bracket., but over the course of a few years, his salary adjusts up to $103,000 because of a series of cost-of-living allowances and an employer change for the same job. Because of , John's $103,000 salary buys only the same amount of goods and services that his $100,000 salary did, but now he's in the 30%
Why Does a Bracket Creep Matter?
Jumping up to a newcan be a good problem to have -- after all, it signifies that the is earning more . But in John's case, where has eaten away at his salary increases, the problem is that the tax code stayed the same during this time of .
Governments often solve this problem via tax indexing, whereby it adjusts the tax rates in lockstep with so that bracket creep does not occur. In the real world, however, tax codes can take a very long time to change. Taxing authorities that wish to increase tax , however, might refrain from , thereby helping the government financially benefit from by allowing inflated incomes to be taxed at higher rates.