GOP tax bill has hidden middle class tax hike

Michael Hiltzik reports for the LA Times on a GOP middle class tax hike hidden in the House and Senate tax bills. Beyond the you may have read on Just Care and other media outlets about how the bill hurts the middle class and working people, the GOP tax bills include a way to calculate inflation that relies on what is called the “chained consumer price index” (CPI). Any measure of inflation is based on a basket of goods and makes assumptions about people’s consumption patterns; a switch to the chained CPI is projected to lower the inflation adjustment from one year to the next.

Over the last many years, the chained CPI has been in the news, largely as a proposed method for setting Social Security benefit increases. And, fortunately, it has not taken hold. It would reduce people’s Social Security benefits. The chained CPI does not accurately take into account cost-of-living adjustments for older people and people with disabilities receiving Social Security benefits. In fact, the best measure would be the CPI-E, which relies on the basket of goods older people typically use.

Now, Congressional Republicans intend to make inflation adjustments for tax rates based on the chained CPI and not the standard CPI. Typically, the chained CPI will find a 0.3 percent lower inflation rate than the standard CPI. And, over time, that represents real money out of the pockets of the middle class, three percent less in ten years and more than six percent less in 20 years.

In practice, if people see wage increases that are in sync with the standard CPI–effectively no income increase–they might find that the chained CPI treats the increase in their wages as an income increase and puts them in a higher tax bracket sooner. Similarly, use of the chained CPI means that increases in the standard deduction and earned income tax credit would be lower than if the standard CPI were used. This would be true for personal exemptions and the alternative minimum tax as well, but as of now the tax bill is set to repeal them.

The Tax Policy Center reports that the switch to the chained CPI would take another $128.2 billion out of middle income earners’ pockets through higher tax rates over the next ten years and another almost $500 billon in the following ten years.

The tax bill does not address CPI calculations for Social Security or government assistance programs. If the GOP next votes to switch out the standard CPI for the chained CPI for these programs, it would reduce Social Security benefits and cut many people out of eligibility for safety net programs, which are linked to the federal poverty level.

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