Inflation and the resulting tax bracket creep has not been a major policy issue since the early 1980s. In the 1970s, it was a big issue, and it will become a very big issue again in a few years. Inflation and tax rates were so high in the 1970s that taxpayers suffered a loss of real wealth on passive income such as interest. Interest income minus taxes was substantially less than inflation. This problem was a major reason for the rise of Ronald Reagan and supply side economics. Since that time, inflation has been subdued. However, inflation does go on albeit at reduced rates.
Bracket creep is a major benefit to politicians. It permits tax increases without new legislation. How does it work? We have a progressive taxation system. If prices and wages are increased by inflation, then the PERCENT of GDP taken by taxation increases. This tax increase will occur with no change in legislated rates. The inflation of the 1970s was ignited by deficit spending to support Lyndon Johnson’s Great Society and financing of the Viet Nam war. Many fear that there will be greater inflation than in the 1970s because of the very large current deficits. Read the whole article.
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