Purdue News

February 1997

Prof: Inflation adjustment means de facto tax increase

WEST LAFAYETTE, Ind. -- Claiming that the U.S. Consumer Price Index overstates inflation, a government panel recently recommended a change in the way the index is calculated.

A Purdue University economics expert said the proposed change amounts to little more than a de facto tax increase for all Americans, and is politically, rather than economically, motivated.

"If the index is recalculated as the panel would have us do, it will appear as if real incomes are rising faster," said Jon D. Haveman, assistant professor of economics. "It also will push millions of Americans into a higher tax bracket. And cost-of-living increases and benefits to Social Security recipients, veterans and government retirees will rise less quickly. The government gets an increase in revenues and a decrease in expenditures, both of which reduce the deficit."

The Consumer Price Index, issued monthly by the Bureau of Labor Statistics, is a comparative analysis of the changes in prices of retail goods and services. According to the index, inflation runs about 3 percent annually. The government uses the computations to index government payments, measure the overall standard of living, and index tax brackets.

Advocates of the adjustment say the current calculation overstates inflation by more than 1 percentage point because it doesn't take into account consumers who buy at discounted prices. The panel, headed by Michael Boskin, claims the adjustment could reduce the federal deficit by as much as a trillion dollars over the next 10 years.

Haveman said inflation may well be overstated, but not by that much.

"The panel appears to be aggressively downgrading the rate of inflation as a way of reducing the deficit, which it does," he said. "Who would say they are against reducing the deficit, especially if it can be done by simply jiggling a few numbers? What they aren't telling us is what it's going to cost us."

Americans living on fixed incomes will be hit the hardest, Haveman said.

"There are somewhere in the neighborhood of 60 million people living on fixed incomes in this country," he said. "Every one of them has income adjusted by the rate of inflation as calculated by the CPI."

CONTACT: Haveman, (765) 494-6156; e-mail, havemanj@mgmt.purdue.edu

Purdue News Service: (765) 494-2096; e-mail, purduenews@purdue.edu

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