Implications of a Chained CPI


    President Obama has released his budget, and so far reaction has been pretty predictable. Republicans, for the most part, dismiss it out of hand (like everything else this president does). Democrats are divided, with criticism coming mainly from the party’s base, centered around the proposal to change the way the cost of living is figured annually.

    Progressives have expressed strong disagreement to the “chained CPI” concept in Obama’s budget (by the way, the same offer he made last December to John Boehner and which Boehner turned down). The whole idea of a “chained CPI” was floated by economists in the 1990’s and a proposal for adopting it as the measure of cost of living increases was embodied in a 1995 report prepared for the Senate Finance Committee, the Boskin Commission Report. Briefly, their conclusion was that inflation measured traditionally is too high because it doesn’t take into account people’s actions when faced with inflation. People buy less of something or switch to a cheaper product when prices rise.

    Why are so many Democrats upset by the Obama budget proposal? Because the people most impacted by a switch to a chained CPI are those on Social Security or those receiving other federal program benefits that go up automatically as the cost of living goes up. However, I personally don’t see why many Republicans and Independents aren’t also questioning the change. It will affect their sacred cows, too.

    A change in the CPI to a lower figure (even though it probably only amounts to about 1/3% per year) will impact a host of other things, including tax deductions and tax bracket movement. For example, if the chained CPI is used to reset tax brackets and you got a raise higher than that CPI, it’s more likely you will move into a higher tax bracket. The standard deduction and the personal deduction will also rise more slowly than under the usual CPI. Not only that, but a change to a lower CPI will have a compounding effect over time, so a small change year to year will become ever larger decades down the road. In essence, it’s a creeping tax increase, one that will impact those with higher incomes to a fair degree.

    Because such a change hits people on Social Security and people making less than $100,000 a year (those most likely to use the standard deductions at tax time) the greatest, the President tried to balance that hit with hits to those who are well-off. Here are my favorite tax reforms that probably have little chance to actually see the light of day, but should:  

    The “Buffet Rule” would apply to households making more that $1 million per year, resulting in a minimum tax rate of 30% (after charitable giving). Tax deductions would be capped for high-income individuals. A loophole would be closed that allows individuals to accumulate millions of dollars in tax-deferred retirement accounts (like Mitt Romney). The budget would provide permanent tax incentives for research and development, renewable energy, and energy efficiency. Oil and gas and corporate jet loopholes would be closed. The ability of people in finance to pay taxes on “carried interest” as if it were a long-term capital gain would end… Sorry, Mitt, but you did lose that election.

    There are some other more progressive ideas in the budget of the president. It provides a bit of relief for those taking out student loans, in the form of lower interest rates. It makes permanent the program that currently helps 11 million students and their families afford college, and it improves the Earned Income Tax Credit and the tax credit for working families with children.

    President Obama has said he will not agree to a compromise that adopts chained CPI but does not end tax loopholes for the rich and doesn’t assist middle-class families. That should be the only way progressives can possibly support this budget. Otherwise, it’s just another plan to make the “least among us” pay for the structural deficit we have, a deficit created by deliberate actions taken by the previous president, George W. Bush, and his allies in Congress.

    Personally, I would get a double hit from a chained CPI. My Social Security and my Virginia Retirement System pensions would both be receiving smaller inflationary increases; however, I’m  willing to do that as my part of deficit reduction, with a very big caveat: People benefiting from tax loopholes and preferential tax treatment of their income also must contribute. Otherwise, count me as opposed to this budget plan.