CNN has reported that a Democratic source familiar with the fiscal cliff negotiations has said that talks have reached a “major setback” because Republicans are insisting that any deal must include Chained CPI. Democrats are standing their ground because they see chained CPI as a “poison pill.”
What is this chained CPI issue that’s holding everything up?
Chained CPI Explained:
As reported by CNNMoney:
The government currently measures price increases using the Consumer Price Index, which tracks a broad basket of consumer goods. That measure is also used to determine increases in tax brackets and cost-of-living adjustments for retirees receiving Social Security benefits.
But some critics say the government is overstating inflation. In reality, when prices rise, consumers turn to alternatives instead of paying more. So for example, if prices rise significantly on beef, they may buy chicken instead.
Enter “chained CPI,” a separate measure that accounts for such substitutions, and therefore paints what some call a more realistic picture of inflation’s impact on consumers.
President Obama is proposing the government use chained CPI to calculate things like Social Security cost of living increases and income tax brackets.
The move could shave $236 billion off the federal budget over the next decade, according to estimates from the Committee for a Responsible Federal Budget, but could also have an effect on consumers’ wallets.
The Democratic source does not wish to be identified, but made it clear that the information was being provided to CNN for the purpose of alerting the public to the Democratic point of view so that Republicans will be under pressure to drop this issue.
The source also shared that Democrats are already “going outside their comfort zone” with regard to tax rates. President Obama may be forced to agree to keep tax rates for higher income households in place, and negotiations on extending the current estate tax rate are also on the table.
The GOP, of course, had their response prepared. A Senate Republican source pointed out that President Obama stated in an interview that aired Sunday that he is willing to explore chained CPI as a way of “strengthening Social Security for the long term.” But the GOP “source” failed to mention that though the president did offer chained CPI to Speaker John Boehner as a venue to explore, it was to be in exchange for changes to the way the debt ceiling is approached, which is not even in the negotiations anymore.
The source did indicate to CNN that a decision will be made by Sunday evening on “whether to pull the plug and put the fallback bill on the floor, a bill that keeps tax rates in place for those making less than $250,000, fixes the Alternative Minimum Tax, includes the so-called Medicare doc fix, and extends unemployment benefits.”
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