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NC State Economist Dr. Mike Walden – “The Chained Inflation Rate”


Mary:  This is Mary Walden with economist MW, welcoming you to the economic perspective.  Today’s program looks at the chained inflation rate.   Mike, one of the changes buried deep in initial tax plan released by the U.S. House of Representatives was the use of a different inflation rate to adjust tax brackets.  Why and how are tax brackets adjusted, and what is the new inflation rate?

Mike:  Summary Answer

  1. tax brackets – the range of taxable income for each of the tax rates – are

adjusted each year to prevent households from being pushed into higher tax

rates just because their income rose due to inflation – called tax-flation

  1. is an adjustment done since the 1980s, and generally applauded
  2. need an inflation rate to make the adjustment, and tax plan wants to use a new

rate called the chained rate

  1. currently use the fixed rate – meaning quantities of products people are assumed

to buy are fixed – no substitutions

  1. chained rate allow people to substitute – like when beef prices rise, people eat

more chicken

  1. so chained rates are more modest, being tax brackets won’t be adjusted as much
  2. but still will produce controversy
  3.   I’m MW

Mary:  And I’m Mary Walden for N C State Extension