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Something I didn’t know

The US tax brackets automatically adjust for inflation:

For instance, the top tax rate of 37% stays the same, but the amount of income to qualify for it rose from $539,900 to $578,125. Meanwhile, the lowest rate of 10% will apply to individuals making $11,000 or less, up from $10,275 in 2022.

Unlike the British ones where the Chancellor announces them each year and may or may not uprate them with inflation.

The effect of this is that the American system collects less money from fiscal drag than the UK one does. Still not nothing of course. In normal times wages rise faster than inflation, so tax brackets still creep down the income scale. But there’s less fiscal drag in the US system than the Brit one.

7 thoughts on “Something I didn’t know”

  1. The string you want to search on is Rooker Wise Lawson Amendment (1977). It made indexation the default; only prior to that could fiscal drag be used for revenue raising without the issue being subject to a Commons vote as a budget measure.

    The 1981 non-indexation was put before the House by Lawson himself who took the opportunity to explain that he was doing so as an obligation under RWL exactly as his contribution had clarified it.

  2. Our income from savings is soaring this year but our income tax bill on it won’t because of ISAs, and Premium Bonds, and the Savings Allowance, and Index-Linked Savings Certificates. They might even over-compensate us for fiscal drag on our taxable incomes. Lovely for us but is it a sensible way to run an income tax system?

    It’s a bit like Inheritance Tax – heaps of fiscal drag unless you happen to be wealthy enough to exploit the uncapped Business Property Relief and Agricultural Property Relief. I suppose if house prices fall there will be a negative fiscal drag effect from the Residence Nil Rate band.

    I believe HMG has an Office of Tax Simplification – ho, ho, ho!

  3. @ dearieme

    “I believe HMG has an Office of Tax Simplification”

    Had. It’s being closed down.

    Back in the day, a colleague of mine was seconded there for his last two years before retirement. Based in London you see. With London Weighting. Final salary pension scheme.

  4. “may or may not uprate them with inflation.”

    You start losing personal tax allowance at £100k. Creates an artificial marginal income tax rate of 60% between £100k and c£125k.

    £100k when introduced in 2010. Still £100k today.

    You start having child Benefit clawed back if you earn over £50k. It’s all clawed back if you earn over £60k. Marginal rate depends on how many sprogs you have. If you had three, and earned £60k, you’d be paying c£4k income tax + £2,636 tax charge on the child benefit. Effective 66% tax rate on that £10k.

    £50k when introduced in 2013. Still £50k today.

  5. Today Lisa Nandy has been commenting on the 45% highest rate band.
    If she has been advised properly then she has been lying.
    There’s a higher rate than that from 50k+ if you have children as the magnificent AndrewC has pointed out.
    And an even higher rate in the 100-125k income range, which is why we have so many doctors reporting taxable incomes just below 100k.


    Everyone knows everything is horrible over here in capitalist free market land where the government is powerless to make things right and fair.

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