HOLLYWOOD
10-28-2011, 10:20 AM
http://blog.american.com/2011/10/the-chained-cpi-is-a-stealth-tax-increase/
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The chained CPI is a stealth tax increase
By Andrew Biggs (http://www.aei.org/scholar/135)
October 28, 2011, 10:28 am
Various news sources are reporting (http://www.washingtonpost.com/politics/health-care/pelosi-shies-from-medicare-social-security-cuts-as-republicans-democrats-swap-deficit-offers/2011/10/27/gIQADdfJMM_print.html) that congressional Democrats on the deficit Super Committee have floated the idea of changing the measure of inflation used for most federal policies. The shift would move from the conventional Consumer Price Index to the so-called “chain weighted” CPI, which better accounts for how buyers change their purchasing habits as relative prices between goods change. The chain weighted CPI generally shows lower inflation by around 0.3 percentage points.
The chained CPI would affect both spending and revenues. On the spending side, Social Security, federal pensions, and certain other payments are indexed to the CPI, so using a lower measure of inflation would reduce Cost of Living Adjustments (COLAs). Likewise, the CPI is also used to index income tax brackets and certain other aspects of the tax code. A lower measure of inflation would push a greater share of individuals’ incomes into higher tax brackets, thereby raising average tax rates and total revenues.
As I’ve argued here (http://www.american.com/archive/2011/may/senior-moment-reduce-colas-and-the-social-security-deficit/), I don’t think the chained CPI is the best measure for Social Security COLAs because it is based on the buying habits of working age Americans, not seniors. A new measure—a chain-weighted CPI specifically geared toward the elderly—would likely show somewhat lower inflation than the current CPI, but not as low as the standard chained CPI.
Likewise, it doesn’t make sense for the tax code to automatically raise revenues over time without Congress having to weigh in. Using the current CPI, income tax revenues would rise to record levels relative to GDP even if we made the Bush tax cuts permanent. Accelerating that increase in taxes—and it is a tax increase—by stealth bypasses the choices we need to make regarding the size of government going into the future.
It would be nice to think that Congress could walk and chew gum at the same time—that is, that they could both balance the books and create good public policy. But it looks like we may have to choose.
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Tags: consumer price index (http://blog.american.com/tag/consumer-price-index/), inflation (http://blog.american.com/tag/inflation/), super committee (http://blog.american.com/tag/super-committee/)
http://blog.american.com/wp-content/uploads/userphoto/abiggs.jpg
The chained CPI is a stealth tax increase
By Andrew Biggs (http://www.aei.org/scholar/135)
October 28, 2011, 10:28 am
Various news sources are reporting (http://www.washingtonpost.com/politics/health-care/pelosi-shies-from-medicare-social-security-cuts-as-republicans-democrats-swap-deficit-offers/2011/10/27/gIQADdfJMM_print.html) that congressional Democrats on the deficit Super Committee have floated the idea of changing the measure of inflation used for most federal policies. The shift would move from the conventional Consumer Price Index to the so-called “chain weighted” CPI, which better accounts for how buyers change their purchasing habits as relative prices between goods change. The chain weighted CPI generally shows lower inflation by around 0.3 percentage points.
The chained CPI would affect both spending and revenues. On the spending side, Social Security, federal pensions, and certain other payments are indexed to the CPI, so using a lower measure of inflation would reduce Cost of Living Adjustments (COLAs). Likewise, the CPI is also used to index income tax brackets and certain other aspects of the tax code. A lower measure of inflation would push a greater share of individuals’ incomes into higher tax brackets, thereby raising average tax rates and total revenues.
As I’ve argued here (http://www.american.com/archive/2011/may/senior-moment-reduce-colas-and-the-social-security-deficit/), I don’t think the chained CPI is the best measure for Social Security COLAs because it is based on the buying habits of working age Americans, not seniors. A new measure—a chain-weighted CPI specifically geared toward the elderly—would likely show somewhat lower inflation than the current CPI, but not as low as the standard chained CPI.
Likewise, it doesn’t make sense for the tax code to automatically raise revenues over time without Congress having to weigh in. Using the current CPI, income tax revenues would rise to record levels relative to GDP even if we made the Bush tax cuts permanent. Accelerating that increase in taxes—and it is a tax increase—by stealth bypasses the choices we need to make regarding the size of government going into the future.
It would be nice to think that Congress could walk and chew gum at the same time—that is, that they could both balance the books and create good public policy. But it looks like we may have to choose.
print this page
Tags: consumer price index (http://blog.american.com/tag/consumer-price-index/), inflation (http://blog.american.com/tag/inflation/), super committee (http://blog.american.com/tag/super-committee/)