The new Republican-passed tax law deploys a new method of tracking inflation called the "chained" Consumer Price Index, a tool that will dampen future adjustments to federal tax brackets and standard deductions, reducing over time the value of touted tax breaks for individuals and companies.
This first use of chained CPI is viewed by guardians of Social Security, federal retirement plans, veterans' compensation and survivor benefits as a worrisome development. If the same method for measuring inflation is adopted widely, they contend, it would cut the lifetime value of most federal benefit plans.
"It's a bad omen, in that it could have repercussions on entitlements, especially at a time when people like (House Speaker) Paul Ryan are announcing they're going to go after earned benefits," said Monique Morrissey, an economist with the Economic Policy Institute.
By making the new index part of the tax code, architects of the tax overhaul created a "significant revenue raiser to help offset some of the other costs in the bill," said David Certner, legislative counsel for AARP.
The retiree advocacy group criticizes the new tax law for cutting tax rates deeply for businesses while giving only temporary tax relief to most households, raising health care costs for millions of older Americans and increasing the federal debt by $1.5 trillion over the next 10 years.
Certner said use of the chained CPI in the tax code will dampen inflation-based adjustments to income tax brackets, standard deductions and contributions employees can make to 401(k)s.
That "means more and more money over time will be taxed at higher rates," chipping away at the value of the tax breaks Republicans now tout.
Federal entitlements have been adjusted for inflation for decades using the Consumer Price Index for Urban Wage Earners and Clerical Workers. A separate but similar CPI for All Urban Consumers had been used for other purposes including to adjust federal income tax brackets until Republicans replaced it last month with the Chained CPI.
Critics of traditional indices argue they overstate inflation by failing to take into account how consumers react month to month to changing prices.
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