The CPI Trap
Last Wednesday Michael
Boskin, George Bush's economics guru, unveiled his report that the Consumer
Price Index overestimates inflation by more than 1 percent a year. Stalwart
budget balancers from both parties quickly embraced revision of the CPI. Even a
relatively small reduction could push the budget several hundred billion
dollars closer to balance by the year 2002 and put Social Security on a sounder
footing for the long term. But Republicans on the Senate Finance Committee, who
requested the study and stacked the Boskin Commission, may have serious
regrets.
After all, if you are one of
Newt's revolutionaries, an overestimated CPI is the practical equivalent of Bob
Dole's tax cuts, Steve Forbes' tax reforms, and Richard Lugar's IRS
abolition--with no messy votes and no responsibility.
Since
1983, tax brackets have moved up in tandem with the CPI. (In more recent years
the personal exemption and standard deduction have been inflated along with the
index.) The CPI's overcounting of inflation during those 13 years means that
the IRS thinks people's purchasing power is about 20 percent less than it
actually is. The resulting revenue loss compounds itself with every year of CPI
overestimation. This year alone, the cumulative effect has cut the IRS' take by
at least $90 billion.
Inflation exaggeration should have special appeal to
proponents of a flat-rate income tax. As long as the tax code is overindexed,
people's incomes have to outpace actual inflation substantially for them to
reach the income levels at which higher tax rates cut in. Already, most
Americans never pay an income-tax rate higher than 15 percent (the 1995 median
household income was $34,076--a married couple would have to make more than
$40,100 to hit the next tax bracket). A few more years of CPI overestimation,
and tax brackets and indexed deductions will be pushed so out of whack with
reality that only a tiny percentage of Americans will ever encounter the
progressive-tax system.
CPI
overestimation also serves another GOP interest: cutting federal programs. As
things stand, if Democrats want to combat the steady erosion of the tax base
and the pressure it puts on their favorite programs, they'll have to vote
eventually to raise taxes and face the electoral consequences. Republicans, by
contrast, can count on their program being implemented without ever putting
anything on the record.
The explicit adoption of such a strategy,
subversive as it may seem of both the democratic process and deficit reduction,
may strike Republicans as irresponsible. But sober reflection should quiet
their qualms. Republicans, after all, do not want to balance the budget just
because it will make their accountant constituency happy--they want to balance
the budget because it is an excuse to cut the federal government, which, if you
are a Republican, is the definition of "responsible."
Adopting
an adjustment to the CPI as the centerpiece of a balanced budget would be a
boon to the Democrats. If the last few elections have shown anything, it is
that voters don't like cuts; if the deficit evaporates, the demand for
cuts--and reforms--evaporates with it.
Social Security is the perfect example. Adopting Boskin's
plan to adjust the index will push Social Security's financing problems another
decade or more into the murky future, upon which voters and politicians never
focus. That would surely be a disaster for Republican dreams of privatizing all
or much of the program--a dream they have not so much because they're keen on
the elderly, but because it would convert all Americans into capitalists,
whether they liked it or not. When the CEO of Exxon and the lowliest janitor in
one of his plants have the same financial interest, Republicans have it made.
If the CPI is corrected, the pressure to make more than token reforms will
evaporate, and the whole deal may be off.
Strangely,
as Republicans continue to make nice about the prospect of adjusting the CPI,
many natural opponents of such a move are silent. Americans for Tax Reform, led
by Newt adviser Grover Norquist, has said nothing. Neither has the
small-business lobby. (The National Association of Manufacturers supports the
adjustment.)
Even liberal economists who are opposing the
CPI adjustment understand how good the status quo is for the GOP. "In the short
term, readjustment hits EITC, Social Security, WIC, food stamps, and school
lunches," says Dean Baker of the Economic Policy Institute, "but in the long
term, taxes will be 30 [percent] or 40 percent higher."
Whether all that amounts to
a tax hike or not depends on whether you count not getting previously
guaranteed tax cuts as a tax increase . But there is a threat of a
real tax increase. Boskin's report admits that much of the commission's 1.1
percent overestimation number is a guess. If they have overestimated how far
the CPI is off, Boskin and his commission may institutionalize an
underestimated CPI--guaranteeing a yearly, stealth tax increase. It is
that prospect that may bring Republicans together to defend a CPI everyone
knows is inaccurate.
