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The Big, Permanent Tax Increase Inside the Tax Cut Act

Let's talk about tax-bracket indexation.

by Justin Fox

December 21, 2017, 7:30 AM GMT+11


Let's take a closer look, shall we? Photographer: Zach Gibson/Bloomberg

It was not a signature element of Ronald Reagan's 1980 campaign or of the tax-cutting plan his administration unveiled in 1981. Several Republican lawmakers (among them Senate Finance Committee Chairman Bob Dole of Kansas) pushed hard for it, and Reagan agreed to include it in the Economic Recovery Tax Act of 1981 .. https://en.wikipedia.org/wiki/Economic_Recovery_Tax_Act_of_1981 , albeit with a delay until 1985 to mute its negative budget impact.

Over time, though, this indexing of tax brackets to inflation has become arguably the most significant and lasting consequence of the 1981 tax legislation. It's certainly been the most expensive, with a revenue impact that as far as I know is no longer tracked but by this point must be multiples larger than any other element of the 1981 cuts. It also seems to have been the inevitable and right thing to do. As the New York Times put it in an editorial .. http://www.nytimes.com/1984/11/05/opinion/next-year-s-tax-cut.html .. in 1984, when some lawmakers -- and Democratic presidential nominee Walter Mondale -- were pushing to delay or alter the provision's looming onset:

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Indexation is the fairest tax reform in many years. To tamper with it is to betray a trust.
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So anyway, you'll never guess what the legislation formerly titled the Tax Cuts and Jobs Act of 2017 does! It tampers with indexation! I wouldn't exactly say that the change is betrayal of a trust, but it is a tax increase that will get bigger and bigger over the decades, and it will weigh heaviest on those in lower tax brackets. Unlike most other individual income tax changes in the new law, it is permanent, and given its positive revenue implications, it is hard to imagine any future Congress rolling it back.

This sure seems like it's worth a closer look.

https://www.bloomberg.com/view/articles/2017-12-20/the-big-permanent-tax-increase-inside-the-tax-cut-act