President Obama’s New Tax Increases

President Obama will propose a number of new tax increases in his budget to be released next Wednesday, according to the Washington Post. These include:

1. Raising the cigarette tax to fund a new federal universal pre-school program,
2. Capping tax-free retirement accounts at $3 million,
3. Limiting the value of itemized deductions to 28 percent of income for high-income individuals,
4. Replacing the consumer price index (CPI) with chained-CPI, as a measure of inflation.

Here’s how the Post describes that last one:

The proposal to change the formula to calculate Social Security payments, also originally part of the offer to Boehner, would generate $130 billion in savings and $100 billion in revenue, a result of the impact of the formula change on other government programs.

Steve Entin helped design the original inflation indexing of tax brackets in 1981. Here’s what he says about changing the inflation index:

The rationale for this proposal is that, over the last dozen years, the chained CPI has risen about a half percent less each year than the regular CPI. Thus, the switch would, among other things, slow the adjustment of the income tax brackets for inflation and reduce the annual cost of living increases (COLAs) for Social Security retirees. Both would be bad policy.

The proposed switch would tamper with the indexing feature of the income tax, the last remaining unaltered piece of Economic Recovery Tax Act signed by Ronald Reagan in 1981. Reducing the adjustment of the income tax brackets for inflation would push people more quickly over time from one tax bracket to the next higher one as incomes grow. Pushing more people from the 15 percent bracket to the 25 percent bracket, or from the 28 percent bracket to the 33 percent bracket, is as much a marginal tax rate increase as any other type of tax rate hike. It would raise marginal tax rates faster over time than under current law and is simply an attempt to disguise a tax rate hike as something else.

…

COLAs that are slightly overstated by the much maligned CPI are not the source of Social Security's looming deficits, and fixing the CPI and COLAs will not save Social Security from impending insolvency.

Read the rest of Steve’s report here.

Follow William McBride on Twitter @EconoWill