Tax indexation and cost-of-living adjustments (COLAs) are closely related concepts aimed at preserving the real value of income and reducing the impact of inflation on taxpayers. Tax indexation involves adjusting tax brackets, exemptions, and deductions to account for inflation, ensuring that taxpayers are not pushed into higher tax brackets solely due to rising prices rather than actual increases in real income. Similarly, cost-of-living adjustments are periodic increases in wages, benefits, or pensions to match inflation, maintaining the purchasing power of individuals.

Both mechanisms are designed to counteract the erosion of income caused by inflation. For example, without tax indexation, inflation could lead to "bracket creep," where individuals pay a higher percentage of their income in taxes even if their real income hasn’t increased. COLAs, on the other hand, ensure that salaries or benefits keep pace with rising living costs. Together, these adjustments help maintain economic fairness and stability.

Governments often use inflation indices, such as the Consumer Price Index (CPI), to calculate both tax indexation and COLAs. While tax indexation focuses on the tax system, COLAs are typically applied to social security, pensions, or employment contracts. Both tools play a vital role in protecting individuals from the adverse effects of inflation, ensuring that their financial well-being is not undermined by economic changes.

Tax indexation and cost-of-living adjustments (COLAs) are both mechanisms designed to mitigate the impact of inflation on individuals' financial well-being. Tax indexation adjusts tax brackets, exemptions, and deductions to account for inflation, preventing "bracket creep," where rising incomes push taxpayers into higher tax brackets without real increases in purchasing power. Similarly, COLAs are periodic adjustments to wages, pensions, or benefits, such as Social Security, to align them with inflation and maintain recipients' standard of living. Both concepts aim to preserve economic fairness by ensuring that inflation does not erode real income or purchasing power. While tax indexation focuses on maintaining tax equity, COLAs address income stability, but both are essential tools in protecting individuals from the adverse effects of rising prices.