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1 Mark Robyn & Gerald Prante, Tax Foundation Projects 2011 Tax Parameters following Release of August CPI Data 1 (2010)

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No. 245                                                                       \\,III
Tax Foundation Projects 2011
Tax Parameters Following
Release of August CPI Data
By Mark Robyn and Gerald Prante
This morning, the Bureau of Labor Statistics (BLS) released its August 2010 estimate for the
Consumer Price Index (CPI), including the estimate for urban consumers (CPI-U). This CPI-U
statistic is typically the final piece of information needed to calculate federal tax parameters such as
the standard deduction, personal exemption, and tax bracket thresholds. The IRS will use these to set
withholding rates on wages throughout 2011 and for 2011 tax forms to be filed in early 2012.
Unfortunately, the rates and brackets that taxpayers will face in 2011 are currently unknown. The
expiring Bush tax cuts have not been addressed by the Congress, and several different outcomes are
possible. All the most likely scenarios are addressed by the Tax Foundation's online calculator of
2011 income tax liability at wvcw. 'yTaxBurden.org, and this morning the calculator has been
updated to reflect the new inflation adjustments.
Inflation Relatively Low
Inflation has been lower over the past 12 months (September 1, 2009 through August 31, 2010) than
the historical average, although it did rise faster over the past year than it did during the previous 12-
month period. Table 1 shows the year-over-year inflation rates since 1992 for the statistic that is used
to calculate tax parameters. For the 2011 tax year, the inflation rate is 1.48%. A year ago, that figure
was 0.19%.
Even though taxpayers will not start filing their 2011 tax returns until January 2012, tax year 2011
parameters are needed in advance of 2011 so that the IRS can produce instructions for 2011 income
tax withholding which will begin in January. Therefore, the inflation adjustments for any tax year
must be based on CPI-U data from portions of the previous two years.

Mark Robyn is staff economist and Gerald Prante, Ph.D., senior economist at the Tax Foundation.

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