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1 Stephen J. Entin, Leave the CPI and COLAs out of the Budget Talks 1 (2012)

handle is hein.taxfoundation/ffdefxz0001 and id is 1 raw text is: December 6, 2012 No. 345 Leave the CPI and COLAs Out of the Budget Talks By Stephen J. Entin, Tax Foundation Senior Fellow Press reports indicate that a key feature of the House Republicans' recent deficit reduction proposal is to switch from the regular consumer price index (CPI) to the chained CPI for adjusting various federal tax and spending formulas for inflation. The rationale for this proposal is that, over the last dozen years, the chained CPI has risen about a half percent less each year than the regular CPI. Thus, the switch would, among other things, slow the adjustment of the income tax brackets for inflation and reduce the annual cost of living increases (COLAs) for Social Security retirees. Both would be bad policy. Tax rate increases in disguise The proposed switch would tamper with the indexing feature of the income tax, the last remaining unaltered piece of Economic Recovery Tax Act signed by Ronald Reagan in 1981. Reducing the adjustment of the income tax brackets for inflation would push people more quickly over time from one tax bracket to the next higher one as incomes grow. Pushing more people from the 15 percent bracket to the 25 percent bracket, or from the 28 percent bracket to the 33 percent bracket, is as much a marginal tax rate increase as any other type of tax rate hike. It would raise marginal tax rates faster over time than under current law and is simply an attempt to disguise a tax rate hike as something else. The progressive tax rate structure is supposed to make people with higher incomes pay more tax than people with lower incomes in any given year. It should not enable the government to automatically take a rising share of the national income without a vote in Congress as Americans' incomes grow over time with advances in technology and labor productivity. To the extent that the regular CPJ adjustment may slightly exceed inflation in some cases, it also protects taxpayers against a sliver of real bracket creep from real wage gains. That protection promotes job growth and the health of the economy. With real bracket creep, the bulk of the workforce could eventually end up in the top tax brackets. Even middle- and low-income earners would be facing European-level income tax rates and perhaps European-level unemployment rates.

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