ABSTRACT
With prices rising at unsatisfactorily high rates, increasing attention has been given in recent years to the relation between inflation and the tax system. Inflation affects real tax burdens in two ways. First, it affects the measurement of several types of income for tax purposes, particularly capital gains, business profits and interest. These problems will be discussed in the section on inflation and accounting below. Second, the personal exemptions, the standard deduction, tax credits, tax rate bracket boundaries and other structural features of the income tax are expressed in dollar terms. If the dollar value of such features remains unchanged as prices and incomes rise, taxpayers’ incomes are thrown into higher tax brackets and effective tax rates increase even if there has been no increase in real income. This increase in effective rates is known as bracket creep.
