Using a Different Measure of Inflation for Indexing Federal Programs and the Tax Code

Federal laws try to protect taxpayers and recipients of government benefits from the effects of rising prices by specifying that dollar amounts in many parts of the tax code and in some programs be automatically adjusted— or indexed—for inflation. Without such indexing, a rise in the general level of prices would alter the effects of federal policies even in the absence of action by lawmakers. For example, if the dollar amounts that delineate the different tax brackets in the individual income tax were not indexed, inflation would push many people’s income into higher brackets and boost average tax rates over time, even if income did not grow faster than prices.