Bieker: ‘Bracket creep’: Delaware’s hidden income tax
Dr. Richard F. Bieker is a retired economist who resides in Dover. He has taught and/or conducted research at a number of institutions, including Delaware State University, the University of Delaware, Purdue University and Central Michigan University.
The recent acceleration of the rate of inflation in the U.S. has undoubtedly caused most Delawareans to see the difference between their nominal income and their real income or what their income buys. The loss in purchasing power of Delaware households because of inflation is compounded by the fact that Delaware has a progressive income tax and doesn’t adjust its income tax brackets for inflation. Delaware’s income tax brackets have not changed since 1999. So, when nominal incomes rise, those incomes are taxed at higher rates. This, in turn, results in lower disposable household incomes. This phenomenon is referred to as “bracket creep.”
The loss in purchasing power because of bracket creep is in addition to any loss in real income that results if the rate of inflation exceeds the increase in nominal income. In this essay, I examine the degree of bracket creep that has occurred with respect to the Delaware income tax between 1999 and 2019 and then review its implications.
Figure 1 shows the change in the price level as measured by the U.S. consumer price index, the mean Delaware adjusted gross income and the revenue generated by the Delaware income tax (tax revenue) for the period 1999-2019. All variables are index values expressed as percentages of their respective 1999 values. The data in Figure 1 indicates that the mean adjusted gross income over the period 1999-2019 increased at an annual rate of 1.79%, or by 45% over the entire period. This was less than the rise in the consumer price index, which increased at an annual rate of 2.06%, or by 53% over the entire period. Hence, the mean adjusted gross income failed to keep up with inflation, resulting in a loss in the purchasing power of Delaware taxpayers. This loss in purchasing power was further reduced by the increase in tax rates, as households were pushed into higher tax brackets by inflation.
Bracket creep results in the following undesirable consequences:
- Bracket creep results in lower after-tax incomes for households at all levels of income. However, its most adverse effects are felt by low-income households. For example, households with taxable incomes of $30,000 in 2019 had their tax liability increased by 105% in 2019 because of bracket creep. By contrast, households with taxable incomes of $150,000 in 2019 had their income tax liability increased by only 7%.
- Bracket creep results in less take-home pay for less skilled low-income workers and hence discourages such workers from remaining in or entering the workforce. This results in lower labor force participation rates. This is particularly detrimental for a state like Delaware because Delaware’s labor force participation rate of 60.2% in December 2022 was in the lowest quartile of all U.S. states.
- Bracket creep incentivizes higher-income individuals (arguably the most productive ones) to migrate to lower-tax states. In contrast to Delaware, an increasing number of states are lowering their income taxes to stem out-migration and spur in-migration and economic growth.
- Bracket creep reduces the amount of income available for savings and capital investment in the private sector. As the Austrian economist Ludwig von Mises noted, “Progressive taxation of income and profits means that precisely those parts of the income which people would have saved and invested are taxed away.” This, in turn, leads to a decline in the rate of economic growth and a lower standard of living for future generations.
The failure of the state of Delaware to adjust tax brackets for inflation not only results in the negative outcomes noted above but is a deceitful way to raise revenue. It requires taxpayers to pay a higher percentage of their income in taxes without requiring any explicit action by the state. Instead of transparently increasing taxes, the state relies on inflation to push households into higher tax brackets. As Joseph Thorndike noted, bracket creep is “a convenient way to raise more revenue — painful for the hapless taxpayers but painless for the gutless lawmakers.”
It's time for Delaware to adjust its income tax brackets for inflation each year to prevent the negative consequences of bracket creep.
If the executive and legislative branches of Delaware’s government want to take more of the taxpayers’ money, they should be required to do so by transparently raising tax rates. This is not such a novel concept. In 1981, the U.S. Congress recognized how deceitful the use of bracket creep was as a means of raising revenue and, as a result, voted to pass President Ronald Reagan’s Economic Recovery Tax Act, which included a provision to adjust tax brackets for inflation each year.
