Taxes, Fiscal Policy, and Inflation
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.
Not only does inflation resemble a tax, it impacts taxes, too. Inflation can push taxpayers into higher income tax brackets or reduce the value of tax credits, deductions, and exemptions. This is known as bracket creep, which results in an increase in income taxes without an increase in real income.
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.
While the U.S. tariffs were intended to protect American industries, they have largely hurt the U.S. economy. Rather than pass on the tariffs to Chinese consumers, analysis shows that most U.S. firms simply bore the costs.
Government-set pricing of prescription drugs is not a fix for today’s rampant inflation and further, it would give rise to new problems of its own.
Tax reform has become a major focus for state legislatures this session, and Missouri lawmakers are tuned in to the action: after adjusting individual income tax triggers in 2021, the legislature is exploring further tax reform options.
In times of inflation, a review of the tax code shows that some provisions are automatically indexed, or adjusted, to match inflation, while others are not. And that creates unfair burdens for taxpayers. But it’s not always as simple as just “adjusting for inflation.”
Lawmakers can be proud of the steps that they have taken toward a better tax code but should consider revisiting the design of the bill’s tax triggers in order to better accomplish their goal of responsible improvement.
The FY 2023 budget proposes several new tax increases, which in combination with the Build Back Better Act, would give the U.S. the highest top tax rates on individual and corporate income in the developed world.
The Biden administration should lift the Trump administration’s tariffs, as they have failed in their objective to bring better trading practices and instead brought about significant damage to U.S. businesses and workers.
After a whirlwind of cuts and reforms in 2021, it looks like 2022 might be an even bigger year for state tax codes. Republican and Democratic governors alike used their annual State of the State addresses to call for tax reform, and there is already serious momentum from state lawmakers nationwide to get the job done.
States are flush with cash, but taxpayers’ purchasing power is being eroded by high inflation. Tax rebates, gas tax holidays, and other temporary tax expedients have the potential to add to existing inflation—but good intentions do not always make for good policy.
Households across the country are struggling with the effects of high inflation. Lawmakers in New Jersey are looking to combat an unlegislated tax increase by indexing the state’s individual income tax code for inflation, something all states should consider.