Will Chained Consumer Price Index Punish the Taxpayers?

Leave it to government to try to reduce the budget deficit on the backs of elderly taxpayers. Bureaucrats have decided that the cost of living adjustments (COLAs) have been too generous and must be scaled back. COLAs are made yearly to offset the loss of purchasing power of money due to inflation.

Simply described, inflation refers to a sustained increase in the general price level. Inflation is calculated as an average since not all prices rise, some remain the same, and some even drop. Rapid inflation and currency depreciation can occur if money is overprinted (quantitative easing), by increasing the money stock without the backing of goods and services to justify the printing.

The Bureau of Labor Statistics (BLS) calculates the unemployment rate and two types of inflation: The Consumer Price Index for all Urban Consumers (CPI-U) and the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

The traditional measurement has been CPI for all consumers, by using a “basket of goods” which changes over time. The “basket of goods” used to calculate inflation include eight major categories with more than 200 groups:

-          food and beverage (cereal, milk, coffee, chicken, wine, snacks, restaurant meals)

-          housing (rent, owners’ rent, fuel oil, bedroom furniture, water and sewage fees)

-          apparel (men’s shirts and sweaters, women’s dresses, jewelry)

-          transportation (new cars, airline tickets, gas, car insurance, car tolls, auto registration fees)

-          medical care (prescription drugs, medical supplies, doctor’s services, eyeglasses, eye care, hospital services)

-          recreation (TV, cable, pets, pet products, sports equipment, admission tickets)

-          education and communication (college tuition, postage, telephone services, computer software and accessories)

-          other goods and services (tobacco, haircuts, personal services, funerals).

Sample goods in each category are chosen “using scientific statistical procedures.” For example, in the apple category, a 4.4 pound bag of golden delicious apples, U.S. extra fancy grade is used. As a consumer, I prefer Gala and Fuji apples.

http://www.bls.gov/dolfaq/bls_ques3.htm

Sales and excise taxes directly associated with the price of specific goods and services are also included in CPI calculations. Income, Social Security taxes, investments such as stocks, bonds, real estate, and life insurance are not included by the Bureau of Labor Statistics (BLS) in CPI calculations.

Since inflation rate has been reported for January (1.6 %), February (2.0 %), and March (1.5 %), (http://www.usinflationcalculator.com/inflation/current-inflation-rates/) and prices in grocery stores and at the gas pump contradict the rosy picture, I am not convinced that food and gasoline prices are included in the CPI currently.

Generic CPI is important because it is a powerful policy control. CPI-W is used to calculate cost of living adjustments (COLAs) for Social Security retirement benefits. CPI-U is used to calculate “annual inflation adjustments to personal income tax brackets,” affecting outlays and revenues. Outlays are government-speak for spending. www.fas.org/sgp/crs/misc/RL32293.pdf

Since 2002, the Bureau of Labor Statistics (BLS) published a Chained Consumer Price Index for all Urban Consumers (C-CPI-U) in order to report CPI “free of substitution bias.” Substitution is an economic term which refers to consumers who change their buying pattern as a direct result of changing relative prices. Consumers buy goods and services more when their prices increase slower over time. If prices rise sharply, consumers substitute those goods.

Policy-makers believe this substitution effect protects consumers from the full effect of rising prices. Neither CPI-W nor CPI-U entirely accounts for substitution thus overstating “the impact of inflation on consumer well-being.” (Julie M. Whittaker, The Chained Consumer Price Index: What Is It and Would It Be Appropriate for Cost-of-Living Adjustments, May 8, 2013)

If I have to switch the quality and type of food I buy (substitute it) for a cheaper or different alternative, it does affect my standard of living. I have insulated myself from higher prices (inflation) but the quality of what I eat has gone down.

Accounting for consumer substitution, the Chained Consumer Price Index (C-CPI-U) has increased less than CPI-U or CPI-W. Politicians argue that less cost of living adjustments (COLAs) should be made to various benefits.

To decrease the budget deficit, lawmakers recommended in reports such as the “2010 Simpson-Bowles” and the April 2013 President Obama’s Fiscal Year 2014 Budget, a government-wide replacement of the CPI-U and CPI-W with the Chained Consumer Price Index  (C-CPI-U) “when calculating automatic adjustments to inflation-indexed federal tax programs and individual tax provisions.”

Wage rates, pensions, interest payments on bonds, income taxes, and many other benefits would be indexed based on the Chained Consumer Price Index which would take into account the substitution effect.

Indexing Social Security benefits, federal and military pensions based on the Chained Consumer Price Index formula will decrease the population’s standard of living if prices increase at an above-average rate. The elderly spend more on health care and prices for such services have increased at an above-average rate. (CRS Report RL32293, Julie M. Whittaker, May 8, 2013, p. 14)

The U.S. Congressional Budget Office (CBO) has calculated that, if the Chained Consumer Price Index (C-CPI-U) will be used:

-          Government revenues between FY2014 and FY2023 will increase by $123.7 billion from the indexation of tax code provisions.

-          The cost of living adjustments (COLAs) for Social Security benefits will result in a decline in outlays of $127.2 billion in the same time period.

-          The cost of living adjustments (COLAs) for federal and military pensions would decline in outlays of $37.5 billion in the same time period.

(Julia M. Whittaker, CRS Report RL32293, May 8, 2013, pp. 15-16)

Once again, switching formulas to the Chained Consumer Price Index (C-CPI-U) and manipulating the math, the government out-of-control spenders win and the retirees, the elderly, the pensioners, and the saving taxpayers lose.

Carbon Tax is Still Environmental Piracy

“Why would they [illegal immigrants] vote for a party that is going to cut taxes they do not pay, but take away government benefits they do receive?” Patrick J. Buchanan

As the country is reeling from the electoral loss and the re-election of President Obama, half rejoicing and the other half in stunned disbelief, the economic reality is beginning to sink in.

People chose the promise of Santa Claus and Christmas every day of the year. Government Santa is likely to slow down in delivering unearned freebies as the economy worsens.

The Dow Industrials reacted immediately to the re-election by dropping more than 300 points. All other indexes also dropped more than 2 percent the next day. The finance and energy sectors will be the hardest hit by the promised increased regulation.

De-developing America has been a stated goal of the President’s platform during the first campaign by increasing energy costs through the bankruptcy of many coal plants via onerous EPA regulations.

Republicans are co-culprits to the de-industrialization of America. They approved NAFTA, GATT, WTO, and allowed free trade with China. Multi-national corporations moved their factories overseas, fired workers, destroyed 6 million manufacturing jobs in the U.S. and moved 55,000 factories out of the U.S. (Patrick J. Buchanan, “Is the GOP Headed for the Boneyard?” November 8, 2012)

The stranded homeless from Hurricane Sandy in New Jersey and New York are poorly cared for, electricity is still absent in many areas, and the infrastructure damaged from the storm surge is at least eight months away from being repaired. To make matters worse, a cold front and a virus outbreak in the FEMA camp is exacerbating the misery.

The divided government, the Democrat controlled Senate and White House, and the Republican controlled House, has many challenges to address. The “fiscal cliff” and reaching the debt ceiling are the most immediate.

On January 1, 2013 the Bush era tax cuts will expire and new higher taxes will take effect, a total of $500 billion, affecting individuals, families, struggling small businesses, and investors. In such a climate of more taxation and lower business confidence, it will be very hard to create jobs. The Obamacare mandate and penalties will additionally force many businesses to make painful layoffs – resulting in higher unemployment.

Massive budget cuts to the military will be automatically enforced through sequestration, a legislative tactic to hold the military budget hostage to the tax increases that Democrats and the administration wish to enforce. Cutting the military drastically and its budget at the time when the Middle East is a basket case, North Korea, China, Russia, and Iran are exercising their military muscles, is not a very safe idea.

Speaker Boehner’s tax reform plan to lower tax rates and eliminate certain tax deductions would lead to higher economic growth than the current anemic 2 percent, resulting in more tax revenues. Raising tax rates without cutting spending is not a viable option. The Speaker of the House believes that “shoring up entitlements and reforming the tax code to bring jobs home” would go a long way to increase economic activity and raise revenue.

Democrats in Congress are eager to raise taxes and continue deficit spending to stimulate the economy. Keynesian economists, who believe it is the government’s job to smooth out the fluctuations in the economy, would choose government spending and tax breaks to stimulate the economy in bad times.

The Washington Post’s Steven Mufson has a bolder suggestion to solve the problem of out-of-control deficit spending that Congress has engaged in: pass a carbon tax to raise enough money to bring the budget deficit under control. “Climate activists hope a carbon tax would reduce greenhouse-gas emissions by penalizing the use of coal, oil, and natural gas.” (Carbon Tax getting closer look, November 10, 2012)

Mufson quotes William Pizer from Duke who said that a “$20-a-ton tax on carbon dioxide would raise gasoline prices by about 20 cents per gallon and boost electric bills slightly.” The tax would take place “upstream, at coal mines, oil and gas wells, or terminals for oil tankers at U.S. shores.”

The problem is that higher gasoline and electricity prices would fall on those who can ill-afford them because average Americans spend a larger percentage of their incomes on gasoline and electricity. Companies who export to countries that don’t have carbon taxes would have to be given subsidies in order to compete, more government spending of taxpayer dollars we do not have. Liberals forget that there is also on-going carbon trading in California and the northeastern part of the United States. The environmentalists proposals to tax CO2 emissions is nothing more than a get-rich scheme for those in power, and a sure way to raise cash for more spending, it has nothing to do with the environment or saving the planet, it resembles more environmental piracy.

Jeff Flake (R-Arizona) co-sponsored a carbon tax bill in 2009 but now “has no plans to reintroduce it or support it as part of a tax reform package.” The American Petroleum Institute opposes the carbon tax on grounds that it will constrain energy production and it will impact the American people by increasing costs.

Add all the EPA onerous new regulations and you have a recipe for economic disaster. It does not matter to liberals that China and India would continue polluting with a vengeance. As long as our polluters are taxed, which in turn will pass these taxes to consumers, the budget deficit gap will be solved – until liberals run out of money and the debt ceiling must be raised again or another scheme will be devised to bring in more revenue.

If the fiscal cliff is not averted, the fiscal crisis will be accompanied by higher unemployment, higher inflation, higher food and energy prices, and higher interest rates. Republicans will have to cave in to Democrats because all the subsequent pain the American public will experience will be blamed on Republicans. After all, we’ve been hearing for the past years every day, everything is Bush’s fault and President Obama inherited a mess from President Bush.

Hurricane Sandy gave mayor Bloomberg a fresh excuse to promote global warming and his Agenda 21 plan for New York. EPA can step in and limit CO2 from power plants and other sources through executive orders. Expensive renewable energy will be pushed again at the forefront in spite of the 12 or more bankruptcies that occurred in the last four years. Corn will be taken out of the food supply and put into bio-fuels, including a new brand of Diesel mixed with rapeseed oil that Europeans are already using, DieselMaxx.

According to Paul Driessen, “Billions of dollars in taxpayers’ subsidies continue to flow each year to bureaucratic zealots, environmental pressure groups, universities, and other organizations. These dollars fund junk science, strained justification for indefensible rules, more pressure to regulate for increasingly diminished returns, and outright propaganda.” (Green agenda threatens economic future, Washington Times, November 8, 2012)

Americans are perennially optimistic and that’s a good thing. Fifty percent of Americans are also extremely gullible and believe in government as Santa Clause. They refuse to accept the fact that “fundamental change” is inevitably life-altering, cannot be reversed, may not have a quick fix, or may not have a fix at all. It is not a piece of merchandise that you can return to the store later if dissatisfied.

When faced with pessimism, Americans react by either verbally shooting the messenger with personal insults or discounting experienced opinion as ranting or defeatist attitude. We are Americans and we can fix everything. President Obama is going to help all poor people by giving them the opportunity to succeed. Somehow before Obama arrived on the world stage, the opportunity to succeed did not exist.

I live in Realityville and have observed carefully the European Union and its disastrous socialist economic policies and multiculturalism. These policies are finally bearing fruit in the U.S. We are a new country today, following into the footsteps of the failed lab experiment of the European Union, including the proposed carbon taxes, a form of environmental piracy.