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With Tax Effects, Chained CPI Draws Coalition of Opposition

Tom Williams/CQ Roll Call
Norquist, left, says the chained CPI would unravel the indexing of tax brackets, but Scalise, right, says the plan could satisfy conservatives if it’s part of a tax overhaul.

When the Obama administration included in its fiscal 2014 budget proposal a plan that would effectively reduce Social Security benefits over the years, officials braced for a strong backlash from Democrats and other defenders of the entitlement program.

The White House certainly got an earful from fellow Democrats, but the idea also is drawing sharp resistance from the right, and that is creating an unlikely coalition of opposition from very different sides of the political spectrum.

That’s because along with shifting to a stingier way of calculating annual cost-of-living adjustments for federal entitlement programs, use of the chained consumer price index also would set a new inflation gauge for the tax code. That would slow increases in tax bracket thresholds, meaning individuals would pay more in taxes as their income grows faster than inflation.

The Congressional Budget Office says that would bring in almost $124 billion more in tax revenue over the next 10 years than current law.

“If you know what it is, and you’re a Republican, you should be against the tax increase part of it,” said Grover Norquist, president of Americans for Tax Reform. The icon of the anti-tax movement argues the proposal would unravel the indexing of tax brackets that took effect in 1985 under President Ronald Reagan.

President Barack Obama included the idea in his budget proposal as part of a larger bid to bring Speaker John A. Boehner, R-Ohio, into a broad deficit reduction plan.

Although Boehner has praised the move, some rank-and-file Republicans, such as Tom McClintock of California, say Norquist’s opposition adds to doubts about the idea. “I’m not wild about the chained CPI,” McClintock said. “It artificially pushes taxpayers into higher brackets, which increases their effective tax rate.”

Although there is debate among economics researchers about chained CPI, it has one clear appeal to politicians: As a technical adjustment to an inflation measure, it would effectively lower Social Security benefit increases without requiring lawmakers to vote directly for reduced benefits.

The Bureau of Labor Statistics’ conventional inflation measure tracks monthly price changes among some 80,000 goods and services that researchers say represent average consumer spending. Proponents say chained CPI is more realistic because it incorporates changes that prices cause in consumer behavior — switching from steak to chicken, for instance, when beef prices rise.

The CBO says the chained CPI advances an average of 0.25 points slower than the conventional CPI on an annual basis. That small difference would compound over time, the CBO says. Social Security benefit payouts would shrink by $127.2 billion from 2014 and 2023 and overall federal spending would fall by $216 billion over that time.

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