Who Benefits from Indexation?

This article analyzes the distributional effects of indexation of the standard deduction, the personal exemption, and the marginal tax rate brackets in the personal income tax. The analysis focuses upon Colorado, a state that enacted full indexation of its personal income tax in 1978. It is found that full indexation is decidedly pro-poor: The percentage reduction in taxes due to indexation falls as income rises, with the percentage reduction nearly four times as great for the lowest income class as for the highest. The factors giving the largest proportional benefit to the lowest-income taxpayers are indexation of the standard deduction and, to a lesser extent, the rate brackets, although the relative importance of the various indexation factors is shown to vary over time.