Inflation and tax brackets

Most tax laws are not accurately 1) _______________. Either they ignore inflation completely, or they are indexed to the Consumer Price Index (CPI), which some argue understates real inflation. In a progressive tax system, failure to index the brackets to inflation will eventually result in 2) _______________ (if inflation is sustained), as inflation in wages will increase individual income and move individuals into 3) _______________ with a higher percentage rate. One example is the Alternative Minimum Tax; since it is not indexed to inflation, an increasing number of upper-middle-income taxpayers have been finding themselves subject to this tax. From 1971 to 1977, as the CPI increased 47%, taxpayers faced 60% more taxes at the local, state and federal levels.

Tax withholdingin the United States

4) _______________ in the United States are primarily 5) __________ by employers on behalf of the Internal Revenue Service (IRS). The Federal income tax uses a system of direct withholding. Employers deduct part of a taxpayer's income directly from their payroll checks. Self-employed individuals make similar payments to the government. The amount of withholding is calculated based on an employee's 6) _______________ and the employee's living situation (married or unmarried, number of dependents, other factors). Withholding does not perfectly calculate an individual's tax each year. The difference between the amount withheld and the actual tax is either paid to the government after the end of the year, or 7) _______________. Withholding is done on an honor system with penalties imposed on individuals who do not have enough withheld (or make enough estimated tax payments) during the year. The amounts deducted can be found in IRS Publication 15, also referred to as Circular E. For farmers, the rules are outlined in Publication 51 (Circular A). The IRS's Publication 505 can also be used to estimate 8) _______________.

Some individuals choose to withhold more of their estimated tax burden than necessary, using the withholding and the refund check at the end of the year as a way of ''forced savings'' (at zero percent interest). Conversely, other individuals withhold as little as possible, using the general rule that, for purposes of avoiding the penalty for 9)_______________ (a ''penalty'' that is essentially analogous to an interest charge that covers the periods from each of four specified interim payment due dates to the initial due date for the filing of the tax return), the total tax paid or constructively paid by April 15th of the year following the tax year in question (i.e., the initial due date for filing the return) need be no more than 100% of the previous year's tax liability. Such individuals thus pay a relatively large amount on April 15. Many individuals fall somewhere in the middle.