8511 / Why are many tax provisions indexed for inflation each year?

Example: Asher, who is a single taxpayer, earns $83,500 as the manager of a computer superstore. Assume at that income level, Asher is at the very end of the 24 percent tax bracket. At the end of the year, he receives a cost of living adjustment (another term for an adjustment for inflation) that increases his salary to $84,500. If tax brackets were not indexed for inflation, Asher’s cost of living raise of $1,000 would be taxed at 32 percent. Yet, based on inflation, $84,500 of today’s dollars is the equivalent of $83,500 of yesterday’s dollars. Thus, without indexing, Asher would experience a tax hike. However, by adjusting the tax brackets by inflation, Asher’s tax liability essentially remains
unchanged.

Under prior law, the indexing factor (referred to in the IRC as the cost-of-living adjustment) was the percentage by which the Consumer Price Index (CPI) for the prior calendar year exceeded the CPI for a year designated as a reference point in each respective IRC Section. In all cases, the CPI was the average Consumer Price Index as of the close of the 12-month period ending on August 31 of the calendar year.¹

The 2017 tax reform legislation provides that items that are adjusted annually for inflation will be adjusted based on the Chained Consumer Price Index for All Urban Consumers (C-CPI-U), as published by the Department of Labor, for tax years beginning after December 31, 2017 (this change is therefore permanent).²