THE TAX-PRICE IMPLICATIONS OF BRACKET-CREEP

An unadjusted progressive income tax generates an increased real allocation of resources to the public sector during inflationary periods. The tax code is scheduled to be indexed in 1985, but this provision may be repealed. The inflation-income tax nexus is addressed from a new perspective - the issue of what the marginal tax-price implications of bracket-creep are as compared to a tax mechanism that imposes marginal tax-prices that parallel previous average tax-prices. Tax liability progression is generally greater for taxpayers filing joint returns compared to those filing single returns, and effectively greater for those utilizing the standard deduction compared to itemizers. Thus, bracket-creep tends to impose higher tax-prices on taxpayers filing jointly and/or using the standard deduction. The results suggest that bracket-creep would not be a popular revenue device compared to alternative finance mechanisms.