Ezra Klein is again reporting that a Fiscal Cliff deal is almost done. And once again, I don’t get this deal. He says that we will see the 39.6% tax bracket but only for incomes over a million dollars. There will be something less for incomes over $250,000 amount. In return for this, the president gets an extension of unemployment benefits and some unnamed stimulus spending. But the payroll tax cut will end. And the biggest thing of all: we will change the way that cost of living adjustments to Social Security are made.
People are calling this new chained-CPI a reduction in benefits. It is most definitely that! But it is also a backdoor way of destroying Social Security. The program will not keep up with inflation. The truth is that the current COLA for Social Security is probably too low, because of what seniors actually buy. For example, they buy a lot of drugs that don’t go down in price and they buy relatively few electronic devices that do.
The trick to chained-CPI is that it assumes that people will substitute. If flashlights get too expensive, people will switch to lanterns! Really. Although it is more along the lines of energy substitution. If heating oil gets too expensive, people will switch to gas. The problem is that this is very likely not an option. When was the last time you changed your water heating system because the price of energy changed? And how much did it cost? But again, the point is not to more accurately model how prices increase; it is to destroy Social Security; or at least to cut it without anyone noticing.
I can very much see Obama going along with this. But it is madness. As I’ve written before, this is not a good deal. What exactly does he think he’s getting? A temporary extension of unemployment? Less tax rate increases than he would get if he did nothing? Unnamed stimulus? None of this makes up for permanent and worsening changes to Social Security!
Update (18 December 2012 8:48 am)
Paul Krugman reports that the deal supposedly includes a capital gain tax increase back up to 20%. Also it is supposed to cap itemized deductions. Even with these, I don’t like the deal. But as Krugman puts it, “If I’m wrong about [the extra tax increases], this is easy: no deal.”
Update (18 December 2012 9:56 am)
Jonathan Chait is at it again. He makes an argument that he, more than almost anyone, should know is bad. He claims that tax increases are the key because “not even conservatives” wanted to cut discretionary programs when they came face to face with them. But that was 20 years ago. As Chait has noted before, the Republican Party is a little different now.