Inequitable Inflation Adjustments of IRC Deduction and Credit Phase-outs

• In Event: Taxation and firm performance
  In Paper Session: Taxation and Firm Performance

Abstract

Inflation causes a taxpayer's average tax rate to increase in a progressive tax system with static personal income tax brackets. Although this provides a benefit to Congress in that the government receives higher tax revenues without needing to raise taxes, it is unpopular with the electorate, particularly during periods of high inflation. Commonly called bracket creep, it existed in the U.S. tax systems until the passage of the Economic Recovery Tax Act (ERTA) of 1981 (P.L. 97-34, 1981). Beginning in 1985, section 104 of ERTA requires the Treasury secretary to adjust personal income tax brackets and the personal exemption amount for inflation annually using the Department of Labor's CPI index for all urban consumers.
Currently, the IRC contains several code sections that include inflation adjustments. The inflation adjustments for the appropriate code sections appear in revenue procedures that are published annually by the Internal Revenue Service (IRS). In particular, a code section containing a phase-out may include a clause for inflating the base income amount, it generally does not include inflating the AGI range of the phase-out. We show that the static ranges cause the phase-outs to be adjusted incorrectly for inflation and taxpayers may lose deductions or credits simply from the effects of inflation.

Authors

• John SEAAA - Yeoman, University of North Georgia

• Pete Oppenheimer, University of North Georgia