The Tax Code Change Most People Aren’t Talking About

Let me say that from a personal income tax standpoint, I give the new tax law a solid thumbs up. It also rates well for businesses large (lower top marginal rate and conversion to territorial taxation, excellent) and small (the 20% off-the-top deduction for pass-through businesses is particularly nice).

However, I haven’t heard many people talk about a significant change in the tax code: changing from the Consumer Price Index for urban areas (CPI-U) to the Chained CPI-U for indexing inflation. The Chained CPI is a more conservative measure that tries to account for how people switch to a different item if the price is too high and fix an issue with small sample size (in economic jargon, it suffers less from “substitution bias and small-sample bias”) It’s technical and full of assumptions, and I’m certainly not interested in looking inside the “black box” to know the minutiae, but it results in a lower indexed inflation rate.

This results in lower Cost of Living Adjustments and a slower increase in federal tax bracket thresholds, which impacts not just what top marginal tax people pay but what credits and deductions they will receive and when those credits and deductions will phase out.

This is good—or at least less bad—for the budget. It stinks for pretty much everyone else, especially those who receive Social Security benefits, federal pensions, and other benefits calculated using the government’s inflation index. For them, it is a slow bleed. Another reason to plan your retirement years carefully, so that you are not wholly dependent on government coffers for your payments.

However, this is what government does, especially when it owes $20 trillion. We the People refuse to accept less now, so we’ll have less later. Blame the government all you want, but this rests squarely on our shoulders. If We the People don’t show the intestinal fortitude to deal with our debt, eventually the government will do even more painful things like use inflation to make our outrageously high debt easier to pay.

For more on the Chained CPI:

https://seekingalpha.com/article/1334361-the-chained-cpi-how-big-of-a-difference-does-it-make

https://www.bls.gov/cpi/additional-resources/chained-cpi.htm

https://www.military.com/militaryadvantage/2018/01/04/chained-cpi-shaves-tax-breaks-will-your-retired-pay-be-next.html

https://www.fool.com/taxes/2018/01/18/your-complete-guide-to-the-2018-tax-changes.aspx

Update: Forgot to mention that the chart at the top of the post is a screenshot from the BLS link. The BLS made a good video on the topic.

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