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57 IRET Congressional Advisory 1 (1997)

handle is hein.taxfoundation/iretcgadv0054 and id is 1 raw text is: April 28, 1997 No. 57 FIX THE CPI, BUT DON'T KILL JOBS Federal budget makers may think that tinkering with the consumer price index would be an easy way to cut the deficit. Slower growth of the CPI automatically would trim Tinkering with Social Security cost of living in bad tax po adjustments (COLAs) and bad way to de would raise taxes by providing confronting So smaller yearly increases in the income tax brackets, personal exemptions, and the standard deduction under tax indexing. Social Security recip- ients who pay income tax on their benefits would lose twice. Deficit reduction should not be the objective of fixing the CPI. Tinkering with the CPI would result in bad tax and economic policy and Ris in would be a bad way to deal risin ariv with the problems confronting reduce in Social Security. There are better ways to balance the economy more budget. comipaed to The weakenint The CPI is generally away at the pro viewed as overstating inflation. as well as costi Some budget makers want the wages. Bureau of Labor Statistics to improve its calculation of the CPI (which it is already doing) or, if BLS won't theC licy al Il wit cial S move far or fast enough, want ad hoc cuts in the annual adjustments to save money for the Treasury. The Boskin Commission's estimate that the CPI increase may be overstated by 1.1 percent per year may overstate the real problem. The Commission's estimate of errors in the index that were related to quality adjustments - about half the total - is more guess than hard fact. BLS has been studying some of the non-quality technical reforms discussed in the Commission report, and is more likely to adopt them than the quality changes. Also, the CPI - a measure of inflation, not the cost of living - fails to incorporate fully the effect of rising taxes on the amount of pretax income needed to buy a given basket of goods and services, and so understates some of the changes in the cost of living. But these are quibbles. Pl would result The more important issue is id would be a whether to reduce the h the problems adjustments of the tax brackets ecurity. and exempt amounts. Trimming tax indexing would result in ever-increasing average tax burdens and gradually but continually rising marginal tax rates. Rising marginal tax rates would reduce incentives to work, save, and invest and would weaken the economy more and more each year compared to current procedures. al tax rates would 'es to work, save, and vould weaken the and more each year current procedures. ' economy would eat jected revenue gains, ngjobs and lowering The weakening economy would eat away at the projected revenue gains, as well as costing jobs and lowering wages. The tax increases associated with the CPI assumptions are designed not only to help reduce the deficit, but also to make room for a variety of tax reductions proposed as part of the budget deal. One of these, the child credit, is an income redistribution policy based on social, not economic, Institute for Research on the Economics of Taxation IRET is a non-profit, tax exempt 501(c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote economic growth and efficient operation of the free market economy. 1730 K Street, N., Suite 910, Washington, D.C. 20006 Voice 202-463-1400 * Fax 202-463-6199 0 Internet www.iret.org

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