Revenues

Use an Alternative Measure of Inflation to Index Some Parameters of the Tax Code

CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.

Billions of dollars 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2015-2019 2015-2024
Change in Revenues 1 5 7 8 11 16 20 23 27 32 33 150

Source: Staff of the Joint Committee on Taxation.

Note: This option would take effect in January 2015. Estimates are relative to CBO’s April 2014 baseline projections. The estimates include the effects on outlays resulting from changes in refundable tax credits.

Some parameters of the tax code are adjusted each year on the basis of changes in the prices of goods and services, as measured by the consumer price index for all urban consumers (CPI-U), to keep their values relatively stable in real (inflation-adjusted) terms. Under this option, the chained CPI-U would be used instead of the standard CPI-U to adjust various parameters of the tax code. The Congressional Budget Office estimates that the chained CPI-U is likely to grow at an average annual rate that is 0.25 percentage points less than growth in the standard CPI-U over the next decade. Therefore, using the chained CPI-U to index tax parameters would increase the amount of income subject to taxation and result in higher tax revenues.