Camp tax reform plan points to a more retirement unfriendly tax system

[kmt1972]

AMT would totally screw the new plan unless they restructure it as well. Somehow they've never been willing to let go of the AMT.

The plan calls for the elimination of AMT. It also will use Chain-CPI instead of CPI to adjust tax brackets. So that is a hidden tax increase over time.

 

[mpeirce]

The plan calls for the elimination of AMT. It also will use Chain-CPI instead of CPI to adjust tax brackets. So that is a hidden tax increase over time.

It may well produce a slower increase, but chained CPI more accurately tracks the cost of living.

Definition of 'Chain-Weighted CPI'

An alternative measurement for the Consumer Price Index (CPI) that considers product substitutions made by consumers and other changes in their spending habits. The chain-weighted CPI is therefore considered to be a more accurate inflation gauge than the traditional fixed-weighted CPI, because rather than merely measuring periodic changes in the price of a fixed basket of goods, it accounts for the fact that consumers’ purchasing decisions change along with changes in prices. Because the fixed-weighted CPI may consistently overstate inflation by ignoring the disinflationary effect of quality improvements and new technology, in addition to the substitution effect, the U.S. Bureau of Labor Statistics maintains that the chain-weighted CPI is a closer approximation to a cost-of-living index than other CPI measures.

Chain Weighted CPI Definition | Investopedia

 

[growing_older]

the U.S. Bureau of Labor Statistics maintains that the chain-weighted CPI is a closer approximation to a cost-of-living index than other CPI measures.

I am completely unconvinced of this and even the example given in the link provided Chain Weighted CPI Definition | Investopedia is a blatant example of why. If prices rise, but consumers substitute inferior goods to keep their expenses down, that doesn't mean inflation is zero, it means that they have been priced out of the market.

Steak costs $2 and hamburger costs $1. I prefer steak and spend $2. But after prices double I can no longer afford steak, so I buy only hamburger, which now costs the same $2 I used to spend on steak after the price doubled. CPI is 100%, prices have doubled. CPI-chain is ZERO, since I have substituted a cheaper good. In these examples CPI-chained does NOT seem to be an accurate measure of inflation.

Also, there is an interpretation element here as someone has to decide who would substitute how much of what goods for what other goods as prices rise. It seems more vulnerable to manipulation than the fixed "basket of goods" method, which is already pretty subjective.

 

[kmt1972]

I actually agree that chained CPI is a more accurate way of measuring cost inflation. My main point is that relative to current law, the proposal to use chained CPI should be seen as a tax increase as chained CPI tend to be lower than CPI by around 0.2%-0.3% all things equal any given year.

 

[Theduckguru]

Because someone who lives in New York City who earns $80k is not really earning "more" than someone earning $75k who lives in Mississippi, for example, because of the presence of higher state and local taxes. The income levels in lower-tax states tend to be lower so they are already paying less in federal income taxes.

The current tax code already allows a little bit for high-tax areas the way it handles deductible sales taxes in lieu of income taxes. It is not enough overall but it is helpful. Removing that would only exacerbate the inequities.

If my retirement income was $80k, I would live in New York City.

 

[eridanus]

I can't see a reason that a person's obligation to support federal spending should be reduced just because they live in a state that taxes them more.

New York takes more local and state taxes for their services. Mississippi takes fewer local and state taxes and relies more on federal spending for their services. Since New York is a federal tax giver and Mississippi is a federal tax taker, New York is bearing the burden for Mississippi's (lack of) spending.*

In effect, New York (and Jersey) are already paying more than their fair share of the federal government's spending. Why should Mississippi get a free pass because they won't raise their local and state taxes?

*Mississippi takes more per capita in federal welfare than New York. Who pays for that if it's not Mississippi residents?

 

[pb4uski]

Good thing there is not a statute of limitations on responses to posts.

 

[samclem]

New York takes more local and state taxes for their services. Mississippi takes fewer local and state taxes and relies more on federal spending for their services. Since New York is a federal tax giver and Mississippi is a federal tax taker, New York is bearing the burden for Mississippi's (lack of) spending.*

In effect, New York (and Jersey) are already paying more than their fair share of the federal government's spending. Why should Mississippi get a free pass because they won't raise their local and state taxes?

*Mississippi takes more per capita in federal welfare than New York. Who pays for that if it's not Mississippi residents?

The premise is faulty. What the federal government sends to the state or individuals in Mississippi has nothing to do with the proper federal tax obligation of the US residents who happen to live in Mississippi. These are totally separate issues. The responsibility to pay federal taxes is an individual one, not one that results from being a resident of a particular state.
Due to write-offs for state and local taxes, a person earning $1 million per year in Mississippi pays more federal tax (and thereby does more to support federal spending of all kinds) than a resident of NY earning the same amount. How can that be justified? They both derive the same benefits from federal spending of all kinds, and have the same obligation to support that spending.
If NY wants to tax its citizens to pay for a new road, monument to a legislator, or an increased dole for its citizens, it's hard to see why this should decrease the responsibility of NY citizens to support federal spending of all kinds (defense, social welfare, courts, research, etc, etc).

 

[Walt34]

Thank you all for an interesting discussion.

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