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.

  1. Purchasing Power

    The value of a currency expressed in terms of the amount of goods ...
  2. Inflation

    The rate at which the general level of prices for goods and services ...
  3. Income Tax

    A tax that governments impose on financial income generated by ...
  4. Index

    A statistical measure of change in an economy or a securities ...
  5. Income Shifting

    A strategy of moving a person's income from a high income bracket ...
  6. Active Management

    The use of a human element, such as a single manager, co-managers ...
Related Articles
  1. Entrepreneurship

    Cost-Push Inflation Versus Demand-Pull Inflation

    Gain a deeper understanding of aggregate supply and demand, forces which raise the price of goods and services.
  2. Bonds & Fixed Income

    Introduction To Treasury Inflation-Protected Securities (TIPS)

    If you want to protect your portfolio from inflation, all you need are a few TIPS.
  3. Economics

    What You Should Know About Inflation

    Find out how this figure relates to your investment portfolio.
  4. Economics

    The Great Inflation Of The 1970s

    Political moves meant prevent unemployment served to do the opposite, creating one of the worst fiscal disasters of the century.
  5. Retirement

    Inflation-Protected Annuities: Part Of A Solid Financial Plan

    If you worry about inflation and longevity risks, this may be the investment for you.
  6. Retirement

    All About Inflation

    What causes inflation? How does it affect your investments and standard of living? This tutorial has the answers.
  7. Taxes

    The 5 Countries Without Income Taxes

    Discover information on some of the best countries to consider relocating to that offer the financial benefit of charging no income tax.
  8. Fundamental Analysis

    7 Ways to Create a Tax-Efficient Portfolio

    Taxes may be a necessary evil, but that doesn't mean they can't be reduced. Here's a host of smart moves today's investors can make.
  9. Economics

    Explaining Fair Market Value

    Fair market value is the price at which a buyer and seller are willing to exchange a good.
  10. Taxes

    4 Reasons Why Delaware Is Considered a Tax Shelter

    Understand what a tax shelter is and how one is normally created. Learn about Delaware and the top five reasons why it's considered a tax shelter.
  1. Why is Panama considered a tax haven?

    The Republic of Panama is considered one of the most well-established pure tax havens in the Caribbean due to extensive legislation ... Read Full Answer >>
  2. Do financial advisors prepare tax returns for clients?

    Financial advisors engage in a wide variety of financial areas, including tax return preparation and tax planning for their ... Read Full Answer >>
  3. How are variable annuities taxed at death?

    If the owner of a variable annuity dies before receiving full payment, his beneficiary must pay taxes on any earnings received. ... Read Full Answer >>
  4. How do I calculate insurance premium tax?

    In the United States, consumers do not pay any additional tax on health insurance premiums. However, your insurance premiums ... Read Full Answer >>
  5. How can I find tax-exempt mutual funds?

    Tax-exempt mutual funds can be found at many prominent investment firms. Most mutual funds offer a variety of investment ... Read Full Answer >>
  6. Are dividends considered passive or ordinary income?

    Despite the fact that earning dividends requires no active participation on the part of the shareholder, they do not meet ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  2. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  3. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  4. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
  5. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
  6. Cost Of Funds

    The interest rate paid by financial institutions for the funds that they deploy in their business. The cost of funds is one ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!