A technical change in the Republican tax bills adds up to a significant tax increase over time. The legislation would change the way tax brackets are adjusted for inflation each year. The new measure of inflation, called the chained CPI, would be less generous than the old one. As a result, each year slightly more people would move into higher tax brackets than under the current measure.
The Tax Policy Center estimates that this shift would bring in $125 billion in extra revenue over the next decade — which helps Republicans reach their goal of cutting taxes by no more than $1.5 trillion.
President Barack Obama suggested that he might be willing to use the chained CPI to calculate the annual cost-of-living adjustments for Social Security, too. Over time that would lead to lower spending on the program.
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Many economists believe that the current Consumer Price Index overstates inflation and that the chained CPI is a more accurate measure. (Conservative scholar Scott Winship wrote about the gory details a few years ago.) Opponents of moving to the chained CPI for Social Security say that it understates inflation among the elderly, but it is not clear that they are right — and even less clear that a better measure exists.
If Social Security checks and tax brackets should be adjusted each year for inflation, they ought to be adjusted by the best measure we have. That’s the best argument for what Republicans are doing on taxes and what Obama suggested doing on Social Security.
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But maybe inflation is not a sufficiently generous index in either case. It might be better to let tax brackets and Social Security payments rise with wages instead.
When tax brackets are indexed only to inflation, it leads to “real income bracket creep.” Because wage gains move people into higher brackets, average tax rates increase and the federal government gets a disproportionate share of any economic growth — and both effects occur without a deliberate vote for them.