Gang of Six Plan Would Raise Taxes on Low-Income Workers

The chained Consumer Price Index (CPI), a provision included in the Gang of Six's deficit reduction package, raises taxes on low- and moderate-income workers, according to a recent report [1] by the Joint Committee on Taxation. This belies the claim that the harm done to the middle class by the chained CPI's benefit cuts would be partly off-set by the revenues it would generate.

The chained CPI, a change in the inflation formula that would result in cuts to Social Security, VA benefits, Supplemental Security Income (SSI), and other benefits, as well as increases in revenue, has been on the table in deficit talks for months. The measure has specifically been seen as a possible point of bipartisan compromise, because it both cuts spending and raises revenues.

The provision has gained even more momentum now that the Gang of Six has included it in their recently unveiled deficit reduction plan.

Progressives have been critical [2] of the benefit cuts that would result from the chained CPI, citing the threats they pose to vulnerable populations like the very elderly and disabled; the failure [3] of the measure to accurately account for the higher health care costs of seniors and disabled persons; and the fact that the cuts would begin right away, falling on current beneficiaries, who have not had time to plan accordingly. Some have pointed out that the change may drive thousands of seniors into poverty. [4]

But few negative things have been said of the revenue increases that the chained CPI would provide. In fact, most progressives confess that they approve of the revenue increases, and would like to see the chained CPI applied to the tax code alone.

Matt Yglesias [5] is one of them. He is skeptical of the new inflation measure's accuracy given the higher health care costs of seniors, but whole-heartedly endorses the chained CPI's revenue increases, as a step on the way to eliminating the inflation indexing of tax brackets altogether:

The important thing about inflation indexing as applied to Social Security is that in practice old people consume much more health care than average people, and old people also tend to be relatively uninterested in high-tech gadgets... On the tax side, however, one of my fondest hopes would be to eliminate the inflation indexing of the brackets altogether so anything that cuts the index rate to a lower level would be welcome.

While commenting on Yglesias' opposition to inflation-indexed tax brackets is above my pay-grade, it is pertinent to note that a recent report [1] by Congress's Joint Committee on Taxation shows that the chained CPI would greatly increase the tax burden of low- and moderate-income workers, while barely affecting millionaires.

For example, if the chained CPI were enacted in December 2012, in 2021 the tax liability of low-income workers with incomes between $10,000 and $20,000 would increase by 14.5 percent, while those with incomes of $1 million and above would see only a 0.1% increase, according to the report.

The chained CPI would raise revenues by slowing the rates at which tax brackets and deductions rise. In the case of the tax brackets, this would increase taxes by making it more likely that a person would enter a higher tax bracket as their wages increase.

I was wondering though, if individuals and households below a certain income level can claim complete income tax exemption, how could their tax liability go up under the chained CPI?

Mike Hauswirth, tax policy analyst for the Democratic staff of the House Ways and Means Committee, explained why workers without any income tax burden could still see their effective tax liability increase.

Under the chained CPI, low-income tax credits such as the Earned Income Tax Credit (EITC), the Child Tax Credit and the Saver's Credit would phase out for many workers at the bottom of the earnings distribution who currently receive them in full.

That is because the low-income tax credits in question would be indexed to the chained CPI. If workers' income grew faster than the chained CPI, then they would outgrow eligibility for the tax credits.

I am not even going to get into the Gang of Six's other "revenue-increasing" provisions. David Dayen has by far the best analysis [6] of their mind-numbing fantasy-world where lower income tax rates will produce $1.8 trillion in new revenue.

Suffice it to say, if the Gang of Six really wanted to increase revenue in a fair, balanced way, there are plenty of options. [7]