There are adjustments to tax provisions due to inflation in order to prevent bracket creep. This occurs when individuals are pushed into lower value deductions or higher income tax brackets due to inflation rather than an actual increase in their real income. Different methods can be used to adjust tax brackets, but the choice of adjustment has different implications for taxpayers. The Consumer Price Index is used as a parameter for making tax and social security adjustments. However, the Chained Consumer Price Index is not suitable for making social security adjustments.
There are two philosophies that either support or object to using the Chained Consumer Price Index for tax adjustments and social security living cost adjustments. The traditional Consumer Price Index and the Chained Consumer Price Index differ in how they respond to changes in consumer purchasing behaviors related to inflation. The traditional Consumer Price Index does not account for substantial substitutions of a product by other related products when there is inflation. On the other hand, the Chained Consumer Price Index does account for the effect of substitution. It recognizes that inflation of a product’s price results in significant substitutions, so an increase in price does not necessarily mean an increase in overall price levels. The Chained Consumer Price Index varies the weights of specific products every month to reflect shifts in consumption behavior. Therefore, the Chained Consumer Price Index is a real measure while the traditional Consumer Price Index is a nominal measure of economic activities.
The choice between using the Chained Consumer Price Index and the traditional Consumer Price Index has a significant effect on taxpayers. The Chained Consumer Price Index allows taxpayers to enter higher tax brackets faster, resulting in higher income taxes over time. Additionally, the choice between the two indexes affects spending policies. When President Obama adopted the Chained Consumer Price Index, government expenditure was reduced by more than $1 trillion, while $800 billion in new taxes were added. This shows that using the Chained Consumer Price Index leads to slower growth of Social Security benefits compared to the traditional Consumer Price Index. Therefore, the Chained Consumer Price Index is not suitable for social security living cost adjustments.
On the other hand, using the Chained Consumer Price Index allows the federal government to cut the federal deficit and increase the amount of tax collected annually. It adjusts taxes based on shifts in consumption of products due to inflation, providing a more accurate measure of general price levels compared to the traditional Consumer Price Index. The use of the Chained Consumer Price Index resulted in an increase in the Consumer Price Index by 0.4 percent, which led to an additional $800 billion in taxes during the Obama administration. However, the Chained Consumer Price Index compounds over time, resulting in a faster increase in tax rates.
In conclusion, the Chained Consumer Price Index provides a more accurate measurement of price levels compared to the traditional Consumer Price Index. However, it is not suitable for adjusting social security benefits due to the obscurity of the tax bracket policy and the faster acceleration of tax rates over time. Nonetheless, the Chained Consumer Price Index is an appropriate method for adjusting taxes.