Tax Indexing

For income tax purposes, tax rates are often broken up into brackets. The more you make, the higher tax rate you pay. If you earn less than $25,000 in a year, you might pay a 15% income tax rate...$25,000-$49,999 might give you a tax rate of 25%, and so on up to Jeff Bezos, who probably has residency on the moon by now and only pays income taxes to the Galactic Federation.

All well and good for fans of a progressive tax system. However, there’s a problem for those wishing to keep tax rates down for low-income-earners: inflation.

Over time, the nominal amounts people earn creep steadily higher. When the income tax started in 1916, $2,500 was a princely annual income. Now, it would count you as the type of person who still used an outhouse and mostly ate varmints scraped off the highway.

Tax indexing prevents this. The tax brackets are automatically adjusted in response to inflation. The brackets themselves are reset every year based on the action of an underlying inflation measure (say, the CPI). That way, the tax brackets equate to relative purchasing power. And we don't have to wait for politicians to make the changes.