The Chained CPI: A Bad Deal All Around
Tax hikes and benefit cuts should be made rationally and openly, not with a stealthy statistical switch.


If adopting the chained CPI for Social Security would be misguided, applying it to the income-tax code would be even worse. Most lawmakers are only dimly aware of how the CPI affects taxes, but it should tell them something that the Obama administration would not accept the chained CPI for Social Security without applying it to the tax code as well.

Currently, the dollar figures that define income-tax brackets, along with most credits and deductions, are indexed to the CPI-U. Since average incomes generally rise faster than the inflation rate, this indexing pushes income into higher tax brackets, even as tax credits and deductions become a smaller fraction of income. Over time, this “bracket creep” produces massive stealth tax increases — higher average tax rates bringing in more revenue for the government. The Congressional Budget Office projects that over the next 25 years, bracket creep generated by the CPI-U will raise personal-income-tax revenues by around 2.6 percentage points of GDP, a nearly one-third increase over the recent historical rate of 8.2 percent of GDP. Indexing the tax code using chained CPI instead would only exacerbate this autopilot trend toward higher taxes.

In other words, Republicans have already acquiesced in a one-third increase in personal-income-tax rates over the next quarter-century, and many appear eager to go for more. Yet Republicans would surely oppose such an increase if they understood it. Making matters worse, the largest rate increases will be on low- and middle-income households. The Congressional Joint Committee on Taxation projects that in 2021, 69 percent of the gains in revenue would come from taxpayers with incomes below $100,000, though they pay only 28 percent of total income taxes. Individuals in the highest income brackets would be left essentially untouched, because most of their income already falls into the highest bracket. Conservative reformers such as National Review’s Ramesh Ponnuru are pushing for a tax code that’s friendlier to families and middle-income earners. The chained CPI is hard to fit into that narrative.

Moreover, while the Social Security cuts due to chained CPI would stabilize at around 4 percent of outlays (being limited by the average recipient’s lifetime), the income-tax increases would keep growing in perpetuity. So while the chained-CPI debate focuses on spending cuts, over the long term the real action is on the revenue side. This is particularly ironic given that, in exchange for “accepting” the chained CPI, the White House is demanding tax increases in addition to those built into chained CPI.

A better approach would index income-tax brackets to the growth of incomes instead of prices, thus stabilizing tax revenues as a percentage of the economy. This would force Congress to make increase taxes explicitly whenever politicians wanted to increase revenues. If tax hikes are necessary, they should be debated and enacted openly, instead of raising taxes by stealth, as will happen with chained CPI.

It’s hard to see how chained CPI can be a win for conservatives. With congressional Democrats opposed, the narrative is already forming that President Obama only proposed using the chained CPI to appease congressional Republicans. But why should Republicans take the rap for a measure that weakens Social Security for the least well-off and institutes a large and regressive tax increase? Higher taxes and a less effective Social Security program — what’s not to dislike?

— Andrew G. Biggs is a resident scholar at the American Enterprise Institute and former principal deputy commissioner of the Social Security Administration.