Q:

Subject: why aren't corporate brackets indexed?

The same goes for the retained earnings limit. Neither have increased for what, 25 years?

A:

You are absolutely right that the C corp tax brackets and threshold for the accumulated earnings tax haven't been changed in far too long and haven't come anywhere close to keeping up with the overall cost of living in this country.

We all take for granted the annual inflation adjustments for the beginning and ending points of individual income tax brackets, as well some other tax items, such as personal exemptions and standard deductions.  However, these are a relatively new part of our tax code and are not even beyond repeal.  Every so often someone in Congress will float the trial balloon of freezing the individual income tax brackets where they are, along with an estimate of the billions of additional tax dollars the Feds will be able to reap just from the bracket creep, where people just keeping pace with normal inflation in terms of their incomes are pushed into higher percentage tax brackets.

The C corp tax brackets are just one item in the tax code that hasn't been allowed to increase with the cost of living.  There are actually several more, such as related to tax free employee benefits and dependent care expenses.  For example, $50,000 of coverage under a group life insurance plan was a lot of money decades ago when this became the cut-off point for a tax free employee benefit; but it's nothing today when policies for millions are more common practice.  Other unfair fixed dollar amounts that readily come to mind are the thresholds for taxing the benefits of evil rich Social Security recipients.  Those figures of $25,000 of gross income for single people and $32,000 for married couples have been in place for so long that more and more people have found themselves having to pay tax on what were supposed to be tax free benefits. 

Even parts of the tax code that have inflation adjustments aren't safe.  The thresholds for the insane Alternative Minimum Tax (AMT) are actually scheduled to drop in 2006, forcing many more people to pay what was supposed to be a tax on only the evil rich.  

When tax laws are passed by our supreme rulers in DC, they include language describing either specific dollar amounts that don't change or a specific provision allowing for an inflation adjustment factor.  While I have never had the time to sit down and actually count each and every tax provision as to whether it uses a fixed dollar amount or one that is raised periodically, I would guess that there are more fixed amounts than floating ones.  That would actually make a very interesting project for some college tax course.  Each student could be assigned a portion of the tax code and tabulate the different threshold amounts and categorize them as fixed or adjustable.  Adding them all together to encompass the entire tax code would be quite enlightening.

Back to your original questions about adjusting corporate tax brackets for inflation, I wouldn't hold my breath waiting for that to happen. In our society today, corporations are considered the focus of evil and anything to reduce their tax burden is a very tough sell.  We would have better luck asking for inflation adjustments of things affecting lower income individuals.

I realize this is a long answer to a short question; but there are few simple things when it comes to discussion of our Frankenstein tax system.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 12/28/2004 04:51:00 PM Send this post: