Marc Goldwein: How to Pay For the Payroll Tax Cut
In an op-ed for The Atlantic, CRFB Senior Policy Director Marc Goldwein made the case for offsetting the costs of the payroll tax cut, AMT patch, and unemployment benefit extension with the chained CPI. He argued that using the chained CPI, which is widely considered to be the most accurate measure of inflation available, makes both technical and budgetary sense. He also noted that the areas of the budget that the chained CPI would affect correspond to the areas that these policy extensions would affect.
On the technical side of the chained CPI, he wrote:
Every year, wages and prices go up. The government wants to measure this inflation to index everything from Social Security checks to tax brackets. The government makes these measurements by focusing on a "basket of goods" to compile its so-called consumer price index, or CPI.
The weakness of regular CPI is that we don't account for when consumers start changing their relative buying habits. If the prices of apples skyrocket, the regular CPI assumes cost-of-living will go way up. But in the real world, most people just buy fewer apples and more oranges.
Moving to the "chained CPI" corrects for this technical flaw by trying to provide an honest assessment of each month's basket and creating a "chain" between them. Moving to a more realistic measure of inflation would save well over $200 billion over the next decade, including from Social Security, other inflation-index programs, and from the tax code.
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"My Views" are works published by members of the Committee for a Responsible Federal Budget, but they do not necessarily reflect the views of all members of the committee.
Correction on 12/22 to include statement that "My Views" do not reflect the entire organization as a whole.