Higher Taxes, Less Inflation May Be Headed Your Way
Your taxes might go up, but you might not know it.
To help pay for tax-cut goodies, Washington politicians are wiggling towards a trim in the cost-of-living index.
Every year, the government adjusts income tax brackets and deductions to account for inflation. Higher inflation numbers raise those adjustments ... and lower the taxes you pay.
A cut in the index means a reduction in those adjustments, and your tax payments will be higher. Social Security benefits, which rise with inflation, would not rise as much.
"The only way [Republican congressional leaders and the White House] can do a budget deal is by fixing the consumer price index (CPI)," says Stanley Collender, a budget expert at Burson-Marsteller in Washington.
The CPI currently overstates inflation by 1.1 percentage point a year, according to a recent presidential commission. That's a huge amount, given that inflation is often about 3 percent.
Senate leaders from both parties have called for a new commission to resolve the inflation-gauge problem.
The Congressional Budget Office reckons that a cut of a full percentage point in the CPI would shave $141 billion from the deficit over five years, $653 billion over 10 years - all on the back of lower Social Security benefits and higher income taxes.
Mr. Collender figures the Republicans and Mr. Clinton will name a group of advisers to put a number on a CPI change, followed by a last-minute budget deal in September.
But economist Cynthia Latta expects "such a furor from the over-65 crowd" that no CPI deal will be worked out. That means less leeway for tax cuts: Her firm, DRI/McGraw Hill., forecasts only $4 billion to $5 billion in tax cuts for fiscal 1998, starting next October.