Definition of Bracket Creep
What does the term "bracket creep" mean? What is meant by the term "bracket creep"?
"Bracket creep" occurs when people in a progressive tax system get pushed into higher tax brackets due to inflation.
For instance - let's say that you make $50,000 a year and you are currently in a tax bracket in which you pay 26% in income tax.
A period of high inflation in the country pushes the cost of goods and services higher. Wages also head higher as well.
Two years pass, and you are now making $60,000 a year. Great, right? Well, inflation has pushed the cost of goods and services higher as well, so the purchasing power of a dollar has dropped considerably.
In short - you are making more money, but your paycheck still buys the same amount of stuff.
The problem? You are very likely in a higher tax bracket now, as you now make $60,000 instead of $50,000. So, instead of paying 26% tax, you may now be paying 29%. This is "bracket creep". You are making more money and will be paying more in taxes, but your buying power is the same as it was when you were making $50,000 a year thanks to inflation.
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