Why the minimum wage and some tax breaks don’t budge despite inflation

[Pelican Press 0]

Why the minimum wage and some tax breaks don’t budge despite inflation

Martin Barraud | Ojo Images | Getty Images

Many Americans are likely familiar with financial thresholds that are adjusted for inflation each year.

They include contribution limits to 401(k) plans, cost-of-living adjustments for Social Security benefits and federal income tax brackets, to name a few.

These tweaks help households keep pace with the rising cost of living.

For example, without adjustments, more households would generally creep into higher tax brackets over time and the buying power of Social Security beneficiaries would fall.

But some thresholds, like the federal minimum wage, aren’t inflation-adjusted.

What is and isn’t inflation-indexed largely depends on lawmakers’ whims when they drafted respective legislation, said Bill Hoagland, senior vice president at the Bipartisan Policy Center. “It’s all over the map,” he said.

Inflation adjustments can be a “double-edged sword,” said Mark Zandi, chief economist at Moody’s Analytics.

During times of high inflation as in 2022, the lack of an adjustment “could quickly become a financial problem” for households, Zandi said.

If everything were indexed, however, it’d be more difficult “to get inflation back in the bottle when everything takes off,” he added.

Here are some common thresholds that don’t get an annual inflation adjustment.

Minimum wage

The federal minimum wage — $7.25 an hour — has remained unchanged since 2009.

That’s the longest ******* in history without an increase from Congress, according to the Economic Policy Institute, a left-leaning think tank.

The minimum wage has

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since 2009 after accounting for the rising cost of living, according to an EPI analysis. It’s worth less than at any point since February 1956, the group found.

That said, just 1.3% of all U.S. hourly workers (about 1 million people total)

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at or below the federal minimum in 2022, according to the Bureau of Labor Statistics. That’s “well below” the 13.4% share in 1979, it said.

Thirty states plus the District of Columbia

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a higher minimum for workers. In addition, 58 localities

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their minimum above their state’s, according to EPI.

The minimum wage is indexed for inflation in 19 of the states plus D.C., EPI said.

Social Security taxes

The federal government began taxing Social Security benefits in 1984.

Social Security benefits

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The dollar thresholds aren’t inflation-adjusted and Congress has never changed them.

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However, since Americans’ benefits and other income have increased, the share of beneficiaries who pay federal income tax on their benefits has risen over time, according to the Social Security Administration.

Less than 10% of families paid federal income tax on their benefits in 1984.

The share has increased significantly: The SSA

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about 40% of people who get Social Security must pay federal income taxes on their benefits.

The federal government uses a specific income formula to gauge if benefits are taxable. This “combined income” formula is: adjusted ****** income + nontaxable interest + half of your Social Security benefits.

For example, single tax filers

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on up to 50% of their benefits if their combined income is between $25,000 and $34,000. Up to 85% may be taxable if income exceeds $34,000.

Married couples filing jointly would pay tax on up to 50% of their benefits if their combined income is between $32,000 and $44,000. Up to 85% may be taxable if income exceeds $44,000.

Investments for the wealthy

Americans must generally be “

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To qualify, households must meet certain requirements, like a minimum net worth or annual income.

It’s a consumer protection issue: The thresholds

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buyers are financially sophisticated and can sustain the risk of loss from private investments, according to the Securities and Exchange Commission.

Individuals can generally become accredited by having a $200,000 annual earned income, or $300,000 for married couples. Individuals or couples can also qualify with a total $1 million net worth, not including the value of their primary residence.

However, those dollar thresholds haven’t changed since their creation in the early 1980s.

In 1983, just 1.5 million households — 1.8% — qualified as accredited investors, according to SEC data.

More than 24 million U.S. households — about 18.5% of them —

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, the agency said in a December report.

Tax deductions for homeowners

Many common tax breaks, like the standard deduction, get an annual inflation adjustment.

But others don’t. A tax deduction for home mortgage interest is one example.

A 2017 tax law signed by President Trump

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for home mortgage interest to the first $750,000 of new mortgage debt. The cap had previously been $1 million. (Neither of these

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to inflation.)

In 2026, that threshold will revert to $1 million absent congressional action.

There are now a record number of U.S. cities where the “typical” home is worth $1 million or more, according to a recent study by Zillow.

Net investment income tax

Certain taxpayers must pay a 3.8% surtax on their investment income.

This “net investment income tax,” also known as the Medicare surtax,

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if modified adjusted ****** income exceeds $200,000 for single tax filers or $250,000 for married ****** filers.

The tax is

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paid by high-income households by design, according to the Congressional Research Service.

However, since the dollar thresholds aren’t inflation-indexed, “more taxpayers become subject to the tax over time regardless of whether their real (inflation-adjusted) income has increased, or increased significantly,” CRS wrote.

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Minimum wage,Income Tax,Local taxes,Taxes,National taxes,Social Security,Government taxation and revenue,Inflation,Personal finance,business news
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