A tax increase Republicans might accept and Democrats might refuse

at 05:09 PM ET, 06/23/2011

So let’s say you get a trillion dollars of spending cuts that Democrats don’t find objectionable and, in fact, don’t even consider spending cuts. How do you get tax increases that Republicans don’t find objectionable and, more to the point, don’t even consider tax increases? One option is to wipe out some tax breaks and close the big loopholes. But that gets a lot harder when you go from talking about vague “loopholes” to specific expenditures like “the mortgage-interest tax deduction.” Another option, and one that’s perhaps more likely, is to try to pass some tax increases that no one can understand.

You’re going to need to bear with me through some terminology here. Right now, Social Security’s cost-of-living increases are tied to the Consumer Price Index for Urban Wage Earners and Clerical Workers and the tax code is indexed to the Consumer Price Index for All Urban Consumers. For reasons too technical to go into in this post, but which the truly committed can read about here, experts on both sides of the aisle think that these measures overstate the actual rate of inflation.

To answer these criticisms, the Bureau of Labor Statistics created a new measure of inflation known as “chained CPI.” Because I’d like at least a few readers to get to the end of this post, I’ll omit the gory details. What’s important is that, as you can see on the graph atop this post, it grows more slowly than its predecessors.That means two things: The checks issued by Social Security and other federal retirement programs grow more slowly, and people’s incomes grow more quickly than the tax brackets. So the government spends less and, because more people are finding themselves in higher marginal tax brackets, raises more.

Over the next 10 years, switching to chained-CPI raises about $300 billion. About two-thirds of that comes from Social Security and other retirement programs. The remainder comes from higher taxes. This reform has a certain amount of support from center-left policy wonks — though they recommend using some of the savings to boost benefits for the poor — but as you’d perhaps expect, AARP and many Democrats don’t like that very much. You could apply it to the tax code and spare Social Security, but it’s not clear Republicans will go for that. Nevertheless, it’s been seriously discussed inside the debt-ceiling negotiations, and Republicans have been careful not to rule it out. I wouldn’t put extremely high odds on seeing it in the final compromise, but I wouldn’t be surprised to find it there, either.

 
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