How Inflation is Quietly Raising Your Taxes
For many Americans, a raise feels like progress. But what if that bump in pay is just enough to push you into a higher tax bracket—without actually improving your purchasing power? That’s the hidden reality of a phenomenon called bracket creep, and it’s costing taxpayers more than they realize.
The CPI Switch and Bracket Creep
In 2017, as part of the Tax Cuts and Jobs Act, the government changed the way it adjusts tax brackets for inflation. Instead of using the traditional Consumer Price Index (CPI), lawmakers switched to something called “chained CPI.”
Chained CPI assumes that when prices rise, people substitute cheaper alternatives. While that may be true for choosing ground beef over steak, it doesn’t reflect the real impact of rising costs on everyday living. This slower inflation measure means tax brackets don’t rise as quickly—so more of your income ends up taxed at higher rates.
For example, a married couple earning $90,000 in 2022 might get a 6% raise to $95,400 in 2023 just to keep up with inflation. But because chained CPI adjusted the brackets less than inflation rose, more of that couple’s income is taxed in a higher bracket—even though their real income hasn’t changed.
How the Marginal Tax System Works
To understand the impact, let’s revisit how the U.S. tax system works. It’s a marginal system, which means different portions of your income are taxed at different rates.
Say you’re a married couple earning $100,000 in 2023. After taking the $30,000 standard deduction, your taxable income is $70,000. The first $23,850 of that is taxed at 10%. The remaining $46,150 is taxed at 12%. That totals just under $8,000 in taxes—an effective tax rate of less than 8%, even though your top bracket is 12%.
But with bracket creep, more of your income pushes into the higher bracket faster, increasing your effective rate over time—even if your lifestyle hasn’t changed.
Proposed Fix: Returning to Regular CPI
Some GOP lawmakers are proposing to reverse the 2017 switch and return to the regular CPI. This change would allow tax brackets to rise more in line with actual inflation, protecting middle-income earners from stealth tax increases.
Under the proposal, bracket thresholds would adjust faster, meaning taxpayers would only pay more when they’re truly earning more in real terms—not just trying to keep up with rising prices. This could save families thousands of dollars over a decade.
However, other elements of the tax code—like the standard deduction and the earned income tax credit—would still be tied to chained CPI. That means even if tax brackets get fairer, other parts of the system would continue to erode in value.
The Bigger Picture: Tax Relief vs. Deficits
The switch back to regular CPI could offer immediate relief for families, but it’s not without consequences. Analysts estimate the full tax proposal, including this change, could add nearly $5 trillion to the federal deficit over the next decade.
To offset this, lawmakers may push for cuts to public programs such as Medicaid and clean energy investments. These long-term trade-offs are critical to understand. Tax relief today might mean funding cuts tomorrow.
Final Thoughts (and a Little Noise)
As Aaron pointed out during the presentation, understanding tax policy isn’t always easy—especially when construction noise and blaring music disrupt your workflow. But hidden shifts like chained CPI have real financial consequences.
Paying attention to the fine print in tax laws can help you make smarter financial decisions and advocate for a fairer system. Because the last thing you want is a raise that makes you feel poorer.
All writings are for educational and entertainment purposes only and does not provide investment or financial advice of any kind.
