Of the many dull-but-important details buried in the Republican tax bills, one of the most devious is a one-word addition to the IRS code that could eventually hurt millions of middle class families. That word is “chained.”
Every year, the government has to adjust certain pieces of the tax code to keep up with inflation. Today, these changes are made based on the government’s official inflation measure, the Consumer Price Index, or CPI-U. But now, Republicans in both the House and Senate want to use a different inflation gauge for the tax code. It’s known as the Chained Consumer Price Index, or C-CPI-U, and was designed in the early 2000s to account for the fact when the cost of one product goes up, families often just buy something else. If pears get really expensive, for instance, Trader Joe’s shoppers will just opt for the apples instead. Or if Honeycrisp prices surge, apple aficionados might switch to Galas. Because the chained CPI corrects for this behavior, it shows the cost of living growing more slowly than the current CPI. At first, the tweak will barely be noticeable. But like a giant, slow-moving plow, it will gradually push households into higher tax brackets, raising billions of dollars to help pay for the GOP’s corporate cuts.
According to projections by the Penn-Wharton Budget model, which they broke down year-by-year at my request, the switch would raise $14.5 billion under the Senate plan in 2025, $33.8 billion in 2030, and $83.6 billion in 2040. Over the whole 23-year window between 2018 and 2040, the move generates about $766 billion, making it one of the single most important pay-fors in the GOP’s plan.
There are a couple reasons why switching to chained CPI is a politically convenient way for Republicans to raise money. First, it’s subtle. Most people’s eyes glaze over when they hear about inflation adjustments. And the effect doesn’t become noticeable until years down the road, when people probably won’t even realize they’re paying more taxes than they otherwise would be under the old tax regime. Second, its won’t tick off GOP donors. The richest Americans don’t really need to worry about where tax brackets start and stop, since they pay the top rate on the vast majority of their income anyway. If you make $5 million or $10 million a year, it doesn’t matter if the highest bracket begins $10,000 or even $20,000 lower. As NYU law professor Lily Batchelder summed it up for me, “It’s a stealth tax increase that only affects the non-wealthy and grows over time.”
Even with the switch to chained CPI, many middle class Americans would still get a tax cut under the plans Republicans are now considering. But some families that benefit in the early years will face a tax hike down the road, as the new inflation measure takes its toll. This is especially a problem under the Senate bill, which sets its tax cuts for individuals to expire after a few years but purposely keeps the move to the chained CPI permanent. The temporary tax cuts are mostly intended as a gimmick to skirt the chamber’s budget rules, and Republicans have insisted that they’ll be renewed by future Congresses. But as written, the legislation amounts to a longterm tax hike on many ordinary Americans, thanks to its tiny tweak to inflation. Younger workers have the most to lose from the CPI swap, since its effect will compound over time, cutting deeper and deeper into their paychecks as they reach their best earning years. It’s a long, slow shakedown for millennials.
There’s another big reason to worry. Washington budget hawks have long wanted to index Social Security’s retirement benefits to chained CPI, in order to slow their growth. Even President Obama temporarily embraced the idea, offering it to Republicans as part of his failed grand budget bargain. And while president Trump has promised not to touch retiree benefits, switching the tax code to chained CPI could set the stage for future Republicans to do the same to Social Security later, since conservatives will be able to argue that the government should use a single consistent inflation measure. The tax bill could be a Trojan horse in a war on the safety net.
To be fair, economists tend to argue that chained inflation indexes are, in fact, a more accurate way to measure rising living costs. But if accuracy was the GOP’s only goal, they could play with the tax code’s inflation measure but also tweak other parts of the system to prevent the eventual burden on millions of middle class Americans. Instead, they’re attempting to claw money from ordinary families, and future generations, in the stealthiest way possible.