Consumer prices rose by 7 percent in 2021, the highest annual rate of inflation since 1982. Where did this inflation come from and what might its impacts be? Tax and fiscal policy offer important clues.
While hoping for inflation’s continued decline, policymakers should finish the job and index the tax code to prepare for future bouts of high inflation and as a contingency in case it takes longer to defeat elevated inflation than expected.
Inflation is often called a hidden tax, but in many states it yields a far more literal tax increase as tax brackets fail to adjust for changes in consumer purchasing power.
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Federal tax collections are approaching the highest levels in U.S. history set during World War II and again during the dot-com bubble in 2000. Meanwhile, federal spending in FY 2022 was over 25 percent of GDP—a level only exceeded during the height of the pandemic in 2020 and 2021, and during World War II.
A new CBO report reveals that lower- and middle-income households are disproportionately shouldering the burden of this current inflation wave. And historical analysis suggests there is much more to come.