Why the minimum wage and some tax cuts remain static despite inflation

Many Americans are familiar with financial standards, which are adjusted annually for inflation.

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

These adjustments help households adjust to rising costs of living.

For example, without adjustments, more households would gradually move into higher tax brackets over time, reducing the purchasing power of Social Security recipients.

However, some standards, such as the federal minimum wage, are not adjusted for inflation.

What is and isn’t inflation-linked will depend largely on the whims of lawmakers as they draft each bill, said Bill Hoagland, senior vice president at the Bipartisan Policy Center. “It varies widely,” he said.

Mark Zandi, chief economist at Moody’s Analytics, said adjusting for inflation could be a “double-edged sword.”

Zandi said that if there is no adjustment during times of high inflation, such as in 2022, “it could quickly become a financial problem for households.”

But if everything is indexed, it will be harder to “get inflation under control again when everything is going well,” he added.

Below are some general standards that are not adjusted for annual inflation.

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

According to the left-leaning think tank Economic Policy Institute, this is the longest period in history without a congressional increase.

Taking into account rising costs of living, the minimum wage has fallen 29% since 2009, according to EPI’s analysis. The group said the minimum wage is at its lowest level since February 1956.

Still, only 1.3% of all hourly U.S. workers — roughly 1 million people in total — will be paid at or below the federal minimum wage in 2022, according to the Bureau of Labor Statistics, a “significantly lower” figure than the 13.4% in 1979, the bureau said.

Thirty states and the District of Columbia have adopted higher minimum wages for their workers. Additionally, 58 local governments have increased their minimum wages higher than the state’s, according to EPI.

According to the EPI, minimum wages are adjusted for inflation in 19 states and Washington, D.C.

The federal government began taxing Social Security benefits in 1984.

Social Security benefits are taxed at the federal level once a recipient’s income exceeds a certain amount: up to 85% of benefits may be taxable (more on this below).

The dollar threshold is not adjusted for inflation, and Congress has never changed it.

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But as Americans’ benefits and other income have increased, the share of recipients who pay federal income tax on their benefits has increased over time, according to the Social Security Administration.

In 1984, fewer than 10 percent of households paid federal income tax on benefits.

This percentage has increased significantly, and the Social Security Administration estimates that about 40 percent of people who receive Social Security must pay federal income tax on their benefits.

The federal government uses a specific income formula to determine whether benefits are taxable. This “total income” formula is your adjusted gross income + nontaxable interest + half of your Social Security benefits.

For example, if you’re a single taxpayer, you’ll pay tax on up to 50% of your benefit if your combined income is between $25,000 and $34,000. If your income is over $34,000, you may be taxed on up to 85%.

Married couples filing jointly can be taxed up to 50% of their benefits if their combined income is between $32,000 and $44,000, and up to 85% if their income is over $44,000.

Americans generally must become “accredited” to invest in private companies, private equity, hedge funds, and other investments.

To qualify, households must meet certain requirements, such as a minimum net worth and annual income.

This is a consumer protection issue. According to the Securities and Exchange Commission, the standard is intended to ensure that buyers are financially savvy and can withstand the risk of loss from personal investments.

Generally, an individual can qualify if they have an annual earned income of $200,000, or a married couple $300,000. An individual or married couple can qualify if they have a combined net worth of $1 million, excluding the value of their principal residence.

However, these dollar standards have not changed since they were set in the early 1980s.

According to SEC data, in 1983, only 1.5 million households (1.8 percent) qualified as accredited investors.

More than 24 million U.S. households, or about 18.5%, will be eligible in 2022, the agency said in a December report.

Many common tax benefits, like the standard deduction, are adjusted for inflation each year.

But some things aren’t. The mortgage interest tax deduction is one example.

The 2017 tax law signed by President Donald Trump limited the mortgage interest deduction to the first $750,000 of new mortgage debt. The cap was previously $1 million. (Neither limit is indexed for inflation.)

In 2026, absent congressional action, the threshold would revert to $1 million.

A recent study from Zillow found that there are now more U.S. cities than ever before where the “typical” home is worth more than $1 million.

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

This “net investment income tax,” also known as the Medicare surtax, generally applies if your modified adjusted gross income exceeds $200,000 for single filers and $250,000 for married filers filing jointly.

According to the Congressional Research Service, the tax is intentionally paid primarily by higher-income households.

But because the dollar threshold is not indexed to inflation, “more taxpayers will be subject to the tax over time, regardless of whether their real (inflation-adjusted) income has increased or increased substantially,” CRS wrote.