Listen to a Business English Dialogue About Bracket creep
Terry: Hi Maya, have you heard about bracket creep in business and finance?
Maya: Yes, I think it’s when inflation pushes individuals into higher tax brackets over time, resulting in higher tax liabilities without corresponding increases in real income.
Terry: That’s correct. Bracket creep can reduce the purchasing power of individuals’ incomes and lead to complaints about unfairness in the tax system.
Maya: Can you explain how bracket creep affects taxpayers?
Terry: Sure, as individuals’ incomes rise due to inflation, they may find themselves in higher tax brackets, resulting in a larger portion of their income being taxed at higher rates.
Maya: Are there any measures to mitigate the impact of bracket creep?
Terry: Governments may adjust tax brackets and rates periodically to account for inflation, implement indexing mechanisms, or provide tax credits and deductions to offset the effects of bracket creep.
Maya: How does bracket creep affect economic growth?
Terry: Bracket creep can discourage work and investment by reducing the after-tax rewards of these activities, potentially slowing economic growth.
Maya: Can you give an example of how bracket creep works?
Terry: Sure, suppose an individual’s salary increases by 5% due to inflation, pushing them into a higher tax bracket where their marginal tax rate increases from 20% to 25%.
Maya: How do policymakers address concerns about bracket creep?
Terry: Policymakers may review and adjust tax policies regularly, taking into account inflation rates and changes in real incomes to prevent bracket creep from eroding taxpayers’ purchasing power.
Maya: Thanks for explaining, Terry. Bracket creep seems like an important consideration for policymakers and taxpayers alike.
Terry: Absolutely, Maya. Understanding how bracket creep affects taxation and economic behavior is crucial for designing effective tax policies and promoting sustainable economic growth.