Inflation creates an insidious and regressive tax on the American citizenry. Rising prices generally outpace increased earnings. Add the tax effect, whereby increased incomes are depleted by our marginal income tax rates, and our individual purchasing power suffers. In times of rampant inflation, as we have experienced since COVID-19, purchasing power erodes at an accelerated and often painful pace.
In the late 1970s and early 1980s, as the country was experiencing Carter Era hyperinflation, presidential candidate (and later President) Ronald Reagan recognized the phenomenon of “Bracket Creep.” Under our so-called “progressive” tax system, higher earners pay increasingly higher percentages of their income in Federal Income Tax. Incomes rose in response to inflation, but tax brackets were not changed in response. Taxpayers found themselves in higher brackets, resulting in further reduction of after-tax purchasing power. Bracket Creep.
This week’s topic, Statutory Items, are hard numbers in the Tax Code, changeable only by Congressional action. One classic example is the $3,000 limit for deducting investment losses in excess of investment gains on an annual basis. This number has been fixed (by statute) at least back to 1978, and with this fixed limit, Americans suffer an annual de facto tax increase through the failure of Congress to inflation-index the deductible limit. Based on an inflation calculator, it should be at least $14,456 today.
A more recent example emanates from the Tax Cut and Jobs Act of 2017 (TCJA), in which the deductibility of State and Local Taxes (SALT) was statutorily limited to $10,000 annually. This number is also not inflation-adjusted.
Neither example is adjusted for filing status, granting the same number to Married couples Filing Jointly (MFJ) as to Single Filers (SF). Logically, the MFJ limit should be double. Inflation indexing during the years since 2017 would produce a substantially larger deduction for affected taxpayers ($12,817 and $25,634, for SF and MFJ, respectively). Again, a de facto tax increase results during any year in which inflation occurs.
Statutory provisions in the Tax Code are guaranteed to penalize taxpayers during inflationary times. I see no reasonable excuse for “freezing” dollar-based items in a Tax Code that claims to be inflation-indexed. The only winner in this process is the U.S. Treasury (through the IRS), and in this case, they certainly did not do anything to earn their windfall.
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