As legislative discussions about the budget progress, the idea of a chained consumer price index (“chained CPI”) is one proposal to hold down spending. Chained CPI is an inflation measure that captures how consumers respond to price changes, as well as measuring the price changes themselves – if the price of a prescription goes up, consumers will buy more generics. The overall effect is that prices, and thus inflation, grow more slowly.
Much of the tax code, including the recent permanent changes to the Alternative Minimum Tax, is linked to inflation to prevent bracket creep – the tendency to move up in tax brackets due to inflation. The Congressional Budget Office has now issued an estimate of the tax effects of a chained CPI, finding that a chained CPI will in effect raise taxes by nearly $124 billion over ten years. The CBO also projected that a chained CPI will reduce overall spending by $216 billion, including $127 in Social Security and $18 billion in refundable tax credits.
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