Why does chained cpi increase taxes

Because the chained CPI climbs more slowly than the primary CPI, the tax bracket thresholds will increase by smaller amounts each year. More people will be pushed into higher tax brackets than they would have under the old law.

However, in his and budgets, President Obama proposed using the chained CPI for both taxes and spending to help reduce the budget deficit. The primary CPI is reported each month, and never revised.

Not so for the chained CPI. The chained CPI rests on data released each month on consumer buying patterns, and these data are revised several times a year.

Therefore, the chained CPI is also revised several times; a final reading is posted between 10 and 16 months after the initial release. Its measure of changes in the cost of living likely differs from that experienced by particular individuals or families. Taxation Senate tax bill: Lower rates for corporations? This move to chain-weighted CPI is expected to push more citizens into higher tax brackets over time, thereby increasing the taxes they owe and, in turn, increasing the tax revenue collected by the Internal Revenue Service IRS.

The year-over-year change will likely be a percentage point or less over a given year, but there is a significant difference over time. For taxpayers with raises indexed to primary CPI, this change may eventually result in them paying more tax in a higher bracket despite not feeling significantly more wealthy. As inflation accelerates this effect will become more pronounced, meaning that more taxpayers will begin feeling the bite of higher taxes in addition to paying more for the goods and services they buy.

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We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Economics Behavioral Economics. Key Takeaways Chain-weighted CPI takes real-word purchasing decisions into account to provide a more accurate picture of the cost of living.

Chain-weighted CPI can capture both general changes in spending, as consumer preferences change, and substitution effects, when relative prices change. But that would be only the start. The best that index designers can do is assemble a market basket that resembles the monthly purchases of a target consumer group — typically urban wage-earners and consumers — and hope they get it close.

One troubling factor recognized by economists is that when prices rise for some item, consumers buy less of it, stop buying it or buy something else instead. This so-called substitution effect makes it hard to compare consumer costs in one month to those in the next. The chained CPI tries to track substitutions month to month, rather than over years, and uses higher-level substitutions.

The BLS publishes a preliminary estimate of the chained CPI about two weeks after the end of every month, at the same time as its traditional CPI release — but revises the chained CPI the following February, and publishes a final figure the February after that. In other words, the chained CPI for any month can be as much as 25 months old.

Some of those revisions can be drastic. For the year that ended December , the Congressional Research Service reported , the initial chained CPI showed an annual inflation rate of 2.

The CPI for all urban consumers that year rose by 2. Our Experts. Carl Davis. Matthew Gardner. Amy Hanauer. Steve Wamhoff.