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A Large Tax Cut? It's Actually Small, As Bracket Creep Eats Into Salaries.(ISSUES & INSIGHTS)(VIEWPOINT)
Byline: Chris Edwards
While critics are still complaining that the $1.35 trillion tax cut is too big, a review of the numbers shows that about half of the cut simply offsets automatic tax increases caused by economic growth.
These automatic tax increases, or "real bracket creep," occur because growth pushes more individual earnings into higher tax-rate brackets. This year's tax cut did not directly address this problem.
Worse, if the tax cut actually sunsets in 2010 as currently written, taxpayers will get hammered as higher tax rates are suddenly applied to a decade's worth of real income gains.
Income Bracket Creep Is Real
The main source of real bracket creep is the steeply graduated rate brackets under the income tax. The five old tax brackets ranged from 15% to 39.6%. The six new tax brackets will range from 10% to 35% when fully phased in.
While tax brackets are indexed for inflation, they aren't indexed for real economic growth. This means that every pay raise you receive above and beyond inflation boosts your average tax rate. The effect is an annual "stealth" tax increase for which no politician is required to vote.
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