Category: 

What is Bracket Creep?

An increase in wages that pushes an employee into the next tax bracket can actually result in less take-home pay.
Article Details
  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 20 November 2014
  • Copyright Protected:
    2003-2014
    Conjecture Corporation
  • Print this Article
Free Widgets for your Site/Blog
A red blood cell can pass through a person's entire body in 20 seconds.  more...

December 19 ,  1998 :  President Bill Clinton was formally impeached by the House of Representatives.  more...

Bracket creep is an economic phenomenon that occurs when people experience an increase in wages, salary, or other income that moves the individual from one tax bracket to the next highest bracket. Generally, bracket creep occurs when an employer issues cost of living or merit raises during the calendar year, resulting in enough additional revenue to move the employee into a different bracket.

Bracket creep is usually concerned with the overall income level of the household. This means that any taxable income earned by the occupants of the household will be factored into the total amount of generated revenue or income for the tax period. Along with wages and salary from a main job, other sources of income can also add to the potential for bracket creep. Second jobs, investment earnings, and interest on savings and other types of bank accounts can all combine to create the incidence of bracket creep.

Ad

At one point in time, the practice of granting an annual cost of living adjustment was a common factor in bracket creep. Generally, the cost of living raise would be just enough to push the employee into the next highest tax bracket. However, many countries took steps in the latter part of the 20th century to account for annual changes in the economic conditions. This meant some changes in the level for each bracket, increasing the amount of standard deductions, and also broadening the range of personal exemptions. These changes made it possible to minimize the chance for bracket creep to occur, especially in times when the economy is going through inflation. By controlling the incidence of bracket creep, the average individual does not in effect become penalized for realizing a small increase in salary or income during the year.

While most individuals do hope for additional income from one year to the next, that hope usually involves realizing enough additional funds to offset the difference in taxes, so there is still some disposal income left from the raise after the tax obligations are met. With the changes and adjustments that have become the norm for most tax programs in many nations, bracket creep has a much lower impact on persons who are considered to be in the middle and lower income brackets.

Ad

More from Wisegeek

You might also Like

Discuss this Article

Vincenzo
Post 4

@Logicfest -- But, is a flat tax really fair? Let's say there is a nationwide flat tax of 10 percent that everyone pays. There are no loopholes and no excuses for not paying in that much income.

You've got two people, say Joe the Millionaire and Blue Collar Bob. Joe makes $1 million a year and pays $100,000 in taxes. Blue Collar Bob makes $40,000 a year and pays $4,000 in taxes. Yes, Joe pays more but the tax but the tax burden hits Bob harder.

How is that system fair? Joe might like it, but what about Bob?

Logicfest
Post 3

@Markerrag -- And there are some who say that getting rid of tax brackets and such altogether is the solution. Implement a flat tax that cannot be modified and must be paid by everyone with income may be the most fair solution of all.

Naturally, though, a lot of accountants would be out of work and the IRS would lose a lot of jobs as a simplified tax code would make life easier for us taxpayers out there. Still, that might be a small price to pay for a tax system that is fair to everyone and actually makes sense.

Markerrag
Post 2

@Terrificli -- Of course, there are some people that maintain that people who make more money should pay more taxes. After all, what is wrong with requiring people who are successful to pay their fair share?

Besides, bracket creep rarely results in higher taxes that out strip a raise. Most people are happy to take more money, but complain if their tax bills go up a bit. What's not fair is allowing those who make more to save on taxes.

Terrificli
Post 1

Things have gotten better in this regard, but bracket creep is still a problem. It is incredible that we in the United States reward hard work by slapping people with higher tax bills. Sadly, that's exactly how things have gone for a lot of families -- make more money, pay more taxes. That is simply not fair.

Post your comments

Post Anonymously

Login

username
password
forgot password?

Register

username
password
confirm
email