Don’t give me the creeps

Here is a quick quiz question and reality redefinition brought to you by President Bush’s Council of Economic Advisers. Fill in the blank:

“[A]s people’s real incomes grow, they become subject to higher tax rates.”

This phenomenon is known as _______________________.

Answer: In the old, reality-based days, this phenomenon was known as progressive taxation. But according to the 2008 Economic Report of the President, (p. 119, Chapter 5: Tax Policy):

“This is called real bracket creep.”

Ten points for Slytherin if you got CEA’s answer. Ten points from Gryffindor if you answered “progressive taxation.”

Explanation: Back in the high-inflation-by-U.S.-standards 1970’s, “bracket creep” was coined to describe the problem that nominal incomes would cross into higher tax brackets simply because of inflation without any increase in real purchasing power. With prices more than doubling over the 1970’s, middle class schnooks found themselves paying tax rates intended only for the rather rich a decade earlier. The problem was completely resolved in TRA86, which indexed the brackets themselves to the Consumer Price Index. (Well, not completely, because there are fights over the accuracy of the CPI and because the Alternative Minimum Tax threshold is not indexed to inflation, but those are stories for a different day.) The point is that “bracket creep” only makes sense as a nominal phenomenon.

The new coinage, which a Google search on “real bracket creep” discovers at such illustrious websites as those of AEI, Cato, and Hannity, is a thinly veiled attempt to “death-tax” progressive taxation. Who could dislike “progressive taxation”? People who have higher incomes pay a higher marginal tax rate, a fundamental characteristic of a fair tax system. But “real bracket creep”? Keep the guv’ment away from my hard-earned pile. I am obliged to the real creeps who floated the idea, but let’s keep progressive taxation.