Tax Cut Meets Bracket Creep: the Rise and Fall of Marginal Tax Rates, 1964-1984

Abstract

Through the process of "bracket creep," the marginal tax rates faced by taxpayers under a progressive income tend to increase as inflation pushes up nominal incomes. Congress has sought to offset the resulting revenue increases by cutting taxes periodically in recent years. Because of the potential economic importance of marginal tax rates, this article examines changes in marginal tax rates since 1964 to assess the effect of inflation and tax cuts on the level and structure of marginal tax rates. The article finds that marginal rates generally have risen over the period, especially for upper income taxpayers. Based on official projections of nominal income growth, marginal tax rates will not, in general, fall as a result of the 1981 tax cut. Only a fundamental restructuring, such as the adoption of a "flat-rate" income tax, has the potential of reducing marginal rates significantly.