Tax Indexing

DEFINITION of 'Tax Indexing'

The adjustment of the various rates of taxation done in response to inflation and to avoid bracket creep. Indexing is a method of tying taxes, wages or other rates to an index to preserve the public's purchasing power during periods of inflation. Bracket creep occurs when inflation drives income into higher tax brackets, which result in higher income taxes but no real increase in purchasing power. Tax indexing attempts to eliminate the potential for bracket creep by altering the tax rates before the creep occurs.

BREAKING DOWN 'Tax Indexing'

During periods of high inflation, bracket creep is likely to occur since tax codes generally do not respond quickly to changing conditions. Tax indexing is meant to provide a proactive solution by using a form of indexation to maintain purchasing power and avoid higher taxation brought on by inflation.