Accounting for Price Changes and Measures of Economic Activities

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  • Author Fred Perry
  • Published March 16, 2021
  • Word count 786

Accounting for Price Changes and Measures of Economic Activities

There exist a series of adjustments of tax provisions due to inflation. The adjustments are necessary because they help prevent the bracket creep. In the phenomenon, individuals become pushed either to reduced value from deductions or to higher income tax brackets due to inflations as an alternative to the actual increase in their real income. There are several methods that can be used in adjusting the tax bracket. Though the choice of adjustment is an obscure policy, different methods have different implications on the taxpayers. The Consumer Price Index acts as the parameter used in making tax and social security adjustments. Despite Chained CPI providing a suitable approach of adjusting taxes, it is not suitable for making social security adjustments.

Difference between Traditional CPI and Chained CPI

There are two varied philosophies that either support or object the use of chained CPI in making tax adjustments as well as social security living cost adjustments. The traditional CPI, nominal measures of economic activities, differ with chained CPI, real measure of economic activity, on how they respond to immediate changes on the consumers purchasing behaviors that relate to inflation. The traditional CPI, inflation does not result in substantial substations of a product by other related products. The calculation of traditional CPI involves taking a set of consumption goods in a base year then tracking the changes in their prices from one year to the next. According to Sullivan (2013), on the other hand, chained CPI accounts for the effect of substitution. The approach holds that inflation of the product price results in significant substitution, hence, the increase in price does not necessarily result in increase in overall price levels. Chained CPI involves varying the weights of a specific product every month to reflect the shifts that exist in consumption behavior (Sullivan, 2013). Therefore, chained CPI is a real measure while traditional CPI is a nominal measure of economic activities.

The Effects of Chained and Traditional CPI on Social Benefits and Federal Government

Impact on Security Benefits

The growth rate of traditional CPI is faster than chained CPI. Moreover, with the increase in time, the gap between traditional CPI and chained CPI widens even more. Therefore, the choice of Chained CPI and traditional CPI has a significant effect on the taxpayers. The use of chained CPI enables taxpayers to enter higher tax brackets faster that result in higher income tax over periods. The choice of either traditional or chained CPI has effects on spending policies as well. President Obama adopted chained CPI as a means of adjusting social security benefits. However, considering that tax bracket adjustment is an obscure policy, choosing chained CPI does not have real effects on most taxpayers. Sullivan (2013) provides the evidence of the use of chained CPI resulting in increases in the amount of tax collected by stating that after president Obama adopted chained CPI, government expenditure became cut by more than $1 trillion while $800 billion new taxes were added. Consequently, the use of chained CPI results in slower growth of Social Security benefits when compared to traditional CPI. Therefore, Chained CPI has no potential for social security living cost adjustments.

Impact on the Federal Government

The use of chained CPI, a more accurate cost living adjustment, enables the federal government to cut the federal deficit and increase the amount of tax collected annually. Chained CPI adjusts taxes of quantities of a typical market bracket based on shifts in consumption of products due to inflation. As a result, the Obama government adopted chained CPI because it provides an accurate measure of general price levels in a market bracket than traditional CPI. According to the Bureau of Labor Statistics (2017), the use of Chained CPI increases the CPI by 0.4 percent. Obama added $800 billion new taxes due to adopting of chained CPI in adjusting taxes (Sullivan, 2013). Therefore, the use of chained CPI increases the amount of taxes collected by the government. According to Keister (2013), the use of Chained CPI results in adjusting the cost of living to below 3 percent of the traditional CPI. However, there is a gap in accelerates because the chained CPI compounds every time.

Conclusion

Chained CPI provides an accurate measurement of price levels of a market in comparison to the traditional CPI. However, chained CPI is not suitable for adjusting social security benefits because tax bracket is an obscure policy and the gap of taxes rate accelerates faster over time because chained CPI enables individuals to move higher tax brackets faster. As a result, the growth of social benefits becomes slower. However, chained CPI provides an appropriate method of adjusting taxes. This article was written by Fred Perry.More my works you can see here https://best-writing-service.com/

My name is Fred Perry and I am a professional writer, I live in New York I like to write different articles for websites and blogs . You can see my works here https://best-writing-service.com/ also I like to travel and read books.

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