The CPI Trap

The CPI Trap

The CPI Trap

Printed.
Dec. 14 1996 3:30 AM

The CPI Trap

Have Republican revolutionaries outfoxed themselves?

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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.

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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.

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T he 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.)

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E ven 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.