by Rick Kahler
With all the talk about tax rates and the fiscal cliff, hardly anyone has mentioned
what is probably the most effective and least understood tax in the federal
arsenal: inflation.
Wait a minute. Isn't it confusing to call inflation a tax?
It is. That confusion is exactly why inflation is the ultimate stealth tax.
One of the few deficit-reducing measures that has the support of both parties and
President Obama is a change in the way the government measures inflation. Our
lawmakers have agreed on another in a series of adjustments to the way they
calculate the consumer price index (CPI). The proposed changes will understate
the future CPI even more than the current formula already does.
This maneuver is a brilliant way for deficit-reducing lawmakers to both cut spending
and increase taxes, without calling their action either a spending cut or a tax
increase.
How is this possible? First, here's a brief explanation of the proposed change,
which is called the chained Consumer Price Index. According to an AP article
published in the Rapid City Journal on December 5, 2012, “the chained CPI
assumes that as prices rise, consumers turn to lower-cost alternatives,
reducing the amount of inflation they experience.”
The assumption is that, if the price of pork rises while chicken doesn’t, people
will buy more chicken. Yet they're still buying protein. Therefore, no
inflation has happened. This argument is like saying if the price of gasoline
goes up and the cost of walking doesn’t, people will just walk more, so there's
no problem.
The chained CPI is a spending cut because many entitlement programs are indexed to
the CPI. These include Social Security, government pensions, veterans benefits,
and the interest on some of the national debt. The lower the increase in the
CPI, the less benefits will rise.
The AP estimates that once the new CPI is fully phased in, a 65-year old on Social Security
will receive $136 a year less. At age 75, the reduction will be $560 annually,
and at 85, it will be $984 less.
In addition, as wages increase at the real inflation rate, entitlement programs
won’t keep pace. Gradually, fewer people will be eligible for programs like
food stamps, Medicaid, heating allowances, and Head Start.
The chained CPI is a tax increase for much the same reason. Many income tax
brackets and deductions are indexed to inflation. Smaller annual adjustments to
the brackets because of the lower CPI will push more people into higher tax
brackets.
Tweaking the CPI is nothing new. Politicians from both parties have done so for years to
give the illusion of a lower CPI than that calculated by previous methods.
ShadowStats.com, run by John Williams, calculates the
current unemployment and inflation rates using the formulas from the 1980s. According
to that methodology, the unemployment rate (U-6) is 15% and the CPI is 9%. Yet
the government has tweaked the CPI so much that today the official CPI is 2.5%.
Under this newest proposal, inflation would be 2.2%.
You may think understating the current CPI by 0.3% isn’t any big deal, but it is. The
decrease represents a 12% drop in the inflation rate, which understates the
increase in our cost of living. If your employer reduced your wages by 12%, you'd
probably see it as a big deal.
Proponents figure the newest CPI adjustment will save $200 billion in spending increases
and raise $65 billion in new taxes over ten years. It doesn't matter whether
you call it inflation, chained CPI, or plain old gimmickry. A tax increase by any
other name is still a tax increase.
Rick Kahler, Certified Financial Planner®, MS, ChFC, CCIM, founded Kahler Financial Group, and became South Dakota’s first fee-only financial planner in 1983. In 2009, Wealth Manager named Kahler Financial Group as the largest financial planning firm in a seven-state area. A pioneer in the evolution of integrating financial psychology with traditional financial planning profession, Rick is co-founder and co-facilitator of the five-day intensive Healing Money Issues Workshop offered by Onsite Workshops of Nashville, Tennessee. He is one of only a handful of planners nationwide who partner with professional coaches and financial therapists to deliver financial coaching and therapy to his clients. Visit KahlerFinancial.com today!
