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Leave the CPI and COLAs Out of the Budget
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 CPI 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 promot