In the Economic Recovery Tax Act of 1981, what is the significance of indexed individual income tax parameters?
When tax brackets are fixed, inflation results in bracket creep – people with relatively low spending power end up paying a higher tax rate. Meanwhile, if the personal exemption and standard deduction are also fixed, the taxable portion of their income also increases. Indexing these parameters to inflation prevents this, keeping the percentage of income paid in taxes constant for a given level of spending power.