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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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