Low inflation is the consumer’s friend, but can also cause some problems including static tax brackets and no cost-of-living adjustments for Social Security checks.
Low inflation is usually seen as the consumer’s friend, since it generally means smaller increases in spending on food, fuel, clothing, and a laundry list of mundane services like haircuts and mail delivery. But when inflation gets down to zero, it can cause some problems. One example is an unofficial prediction by group of independent tax experts that, because of zero inflation, the income tax brackets for 2010 will be the same as this year. Personal exemptions and standard deduction amounts will also stay the same.
Although that may not seem like a big issue, it can have a negative tax impact if you’re a taxpayer who is near the top of your tax bracket. If you are lucky enough to make more money next year, you can’t count on an upward revision of the tax brackets to save you from landing in the next higher bracket. For example, if you’re in the 28% tax bracket and your taxable income is near the top income limit of $208,850 (for married couples filing jointly), an income boost of just a few thousand dollars in income next year will push you into the 33% tax bracket. This year, on the other hand, if you were near the 2008 limit of $200,300, you could increase your taxable income by almost $8,000 and still be in the same tax bracket.
Zero inflation will also impact Social Security checks for seniors because there will no cost-of-living adjustment this year for the first time since they were introduced in 1975. Although by law Social Security benefits can’t go down, checks are likely to shrink because of anticipated increases in premiums for Medicare Part B and for the Part D prescription drug program.