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Commentary

Changing Inflation Measure Sets Stage for Higher Taxes

The new tax law adjusts how provisions are, or aren't, indexed--meaning higher real rates are ahead.

As Congress put together the Tax Cuts and Jobs Act, it needed a way to keep the costs of a package full of tax cuts to $1.5 trillion over 10 years to satisfy some members of the Republican caucus and to avoid running afoul of procedural rules. One way it did this was by setting many of the provisions to expire in 2026. But Congress also built in a slow series of tax increases by changing the way many features of the tax code are adjusted for inflation--and it made this new, future tax increase permanent.

Going forward, instead of adjusting for inflation with the traditional measure--the consumer price index for all urban consumers--Congress will use "chained CPI." The bottom line on chained CPI is that government scorekeepers expect it to grow about .25% slower than traditional CPI. When applied to features of the tax code, the shift to a slower measure of inflation increases taxes more than in the past, when Congress designated the traditional measure of inflation as an adjuster.

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