Grad­ual tax in­creases buried in House Repub­li­can bill

The Washington Times Weekly - - Politics - BY STEPHEN DINAN

Buried amid the de­duc­tions and cred­its, House Repub­li­cans have made a ma­jor shift in tax pol­icy that would mean an es­ca­lat­ing tax in­crease on ev­ery Amer­i­can tax­payer over the en­su­ing decades.

Repub­li­can tax-writ­ers have de­cided to shift the tax code’s in­fla­tion in­dex from the Con­sumer Price In­dex, or CPI, to some­thing known as chained CPI, which is a slower-grow­ing method of cal­cu­lat­ing cost-of-living in­creases.

Us­ing the lower rate of in­fla­tion to cal­cu­late fu­ture tax rates means tax­pay­ers will more quickly fall into higher tax brack­ets, mean­ing they will pay more in taxes than if Repub­li­cans stuck with the tra­di­tional mea­sur­ing stick.

It works out to tax­pay­ers pay­ing $128 bil­lion more to Un­cle Sam than they would oth­er­wise over the next decade, and $500 bil­lion more in the sub­se­quent decade.

“It’s a sneaky po­lit­i­cal move. It’s a hid­den tax in­crease that will be in­vis­i­ble to vot­ers,” said Chris Ed­wards, direc­tor of tax pol­icy stud­ies at the Cato In­sti­tute and edi­tor of Down­siz­ingGovern­ment. org. “There’ll be no news­pa­per story ex­plain­ing there’s a tax in­crease ev­ery year, but that’s es­sen­tially what this will be.”

Cost-of-living ad­just­ments are built into most of the fed­eral bud­get and have been for decades. The the­ory is that as a dol­lar doesn’t stretch as far, tax­pay­ers shouldn’t be asked to pony up as if it did — and the gov­ern­ment needs to boost spend­ing on ben­e­fit pro­grams just to keep pace with con­sumers’ needs.

That means that num­bers in the tax code change ev­ery year. For ex­am­ple, the stan­dard de­duc­tion was $6,200 for a sin­gle tax­payer in 2014 but rose to $6,300 in 2015. The point at which the top tax rate kicked in was $406,750 in 2014, ris­ing to $413,201 in 2015.

The rate of in­crease is based on the Con­sumer Price In­dex for all Ur­ban Con­sumers, or CPI-U, and it mea­sures in­creases in costs for more than 200 items of food, cloth­ing, hous­ing, en­ergy and ser­vices needed for day-to-day living.

In 2002, the gov­ern­ment be­gan pub­lish­ing the chained CPI, which uses a dif­fer­ent method of av­er­ag­ing and looks at a broader time frame — chain­ing months to­gether — which many econ­o­mists say is the yard­stick the gov­ern­ment should use.

“Chained CPI is ab­so­lutely a more ac­cu­rate mea­sure of in­fla­tion,” said Marc Gold­wein, se­nior vice pres­i­dent at the Com­mit­tee for a Re­spon­si­ble Fed­eral Bud­get. “All econ­o­mists that aren’t be­ing hack­ish agree that chained CPI is bet­ter.”

In gen­eral, chained CPI grows more slowly than the tra­di­tional mea­sures. The Con­gres­sional Bud­get Of­fice says it lags by about a quar­ter of a per­cent­age point.

For a sin­gle year, that doesn’t make much dif­fer­ence. But the ef­fects build up over time.

The Tax Pol­icy Cen­ter crunched the num­bers on the Repub­li­cans’ frame­work this year and cal­cu­lated that tax­pay­ers would pay $125 bil­lion more over the next 10 years us­ing chained CPI in­stead of the cur­rent method. In the decade fol­low­ing, it will be $500 bil­lion.

Joseph Rosenberg, se­nior re­search as­so­ciate at the cen­ter, said the de­ci­sion about switch­ing is a ques­tion about what pol­i­cy­mak­ers are try­ing to do.

“You might be mov­ing to­ward a more ac­cu­rate mea­sure of in­fla­tion, but you’re mov­ing away from in­dex­ing for real growth,” he said. “Bracket creep — peo­ple get richer over time, move into higher brack­ets. To the ex­tent you think that’s a prob­lem, then you’re mov­ing in the wrong di­rec­tion.”

For years, Repub­li­cans have fought to use chained CPI as the in­fla­tion in­dex on the spend­ing side. That would mean au­to­matic benefits such as So­cial Se­cu­rity would in­crease at a slower rate, saving tax­pay­ers tril­lions of dol­lars over time.

Democrats have re­sisted, say­ing slower growth would be tan­ta­mount to a ben­e­fit cut.

An­a­lysts said there was al­ways a deal out there — Repub­li­cans would agree to sub­ject the tax code to chained CPI, pro­duc­ing more rev­enue, while Democrats would agree to sub­ject spend­ing to chained CPI, saving tax­pay­ers money.

Repub­li­cans’ uni­lat­eral de­ci­sion on taxes could up­set that bal­ance.

Mr. Gold­wein said he be­lieves Repub­li­cans act­ing alone make it tougher to get chained CPI on the spend­ing side be­cause it takes away the lever­age for a trade. Mr. Rosenberg said he thinks it makes it eas­ier.

But he said the big­gest use may be help­ing Repub­li­cans con­form to com­plex Se­nate bud­get rules. Hav­ing that much ad­di­tional rev­enue in fu­ture years can off­set the grow­ing losses from other tax cuts.

In­deed, the GOP plan an­nounced called for switch­ing to chained CPI in 2023. Just a day later House Ways and Means Chair­man Kevin Brady an­nounced an up­date that switches to chained CPI be­gin­ning next year, earn­ing hun­dreds of bil­lions of dol­lars in ad­di­tional bud­get space.

Steve El­lis, vice pres­i­dent at Tax­pay­ers for Com­mon Sense, said if a lower in­fla­tion yard­stick is right for one part of the fed­eral fis­cal pic­ture, it should be used for all parts.

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