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About Those Tax Cut Savings…

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Your Trump tax cut isn’t going to be quite as big as you might have thought.

According to a report by the Wall Street Journal, a new inflation measurement included in the GOP plan and recently implemented by the IRS will cut into your tax cut savings in 2019.

Ron Paul warned you about this during the debate over the tax cuts. 

The WSJ cited Congress’s Joint Committee on Taxation estimates projecting that a new inflation measure included in the GOP plan will result in a slower rise in the annual standard deduction than would have occurred under the old tax system. According to the Tax Foundation, also cited in the WSJ article, a married couple’s standard deduction in 2019 will come in about $150 lower than it would have been under the old inflation-adjustment model.

While this won’t significantly raise your tax bill this year, over time, the inflation calculation will erode away the benefit of the tax cuts. According to the Tax Foundation, about 9% of taxpayers will actually end up paying more by 2025 than they would have under the old tax scheme. Nearly every taxpayer will see a decrease in tax savings from the cuts over time.

In simple terms, the new inflation adjuster allows Congress to raise your taxes every year without having to pass any kind of tax increase. It’s a stealthy tax increase most people won’t notice.

“It is a broad change to the definition of what is taxable and the change is very subtle,” Kyle Pomerleau, director of the Tax Foundation’s Center for Quantitative Analysis, told the WSJ. “It will take years before it really kicks in and tax bills are noticeably different. However, even then it will be hard to tell because everyone’s economic situation will have changed.”

During the debate over the Republican tax plan, Ron Paul warned that it was going to increase “the most insidious of all taxes” — the inflation tax. The tax reform adopted what is known as the chained consumer price index (chained CPI) to determine future adjustments of tax brackets. Ron explained it this way:

Chained CPI is a way of measuring CPI that understates inflation’s effects on our standard of living. It does this by assuming inflation has not reduced Americans’ standard of living if, for example, people can buy hamburgers when they can no longer afford steak. This so-called full substitution ignores the fact that if individuals viewed hamburgers as a full substitute for steak they would have bought hamburgers before Fed-created inflation made steak unaffordable.

“Chained CPI increases the inflation tax. The inflation tax may be the worst of all taxes because it is hidden and regressive. The inflation tax is not even a tax on real wages. Instead, it is a tax on the illusionary gains in income caused by inflation. The use of chained CPI to adjust tax brackets pushes individuals into higher tax brackets over time.”

Using chained CPI allows politicians to effectively increase taxes without adjusting rates. In other words, taxes go up while politicians are shielded from having to vote on a tax increase. Instead, the Federal Reserve does the dirty work. Fed monetary policy drives up inflation – on purpose. The central bank’s stated goal is to boost inflation at a target of 2% per year. That doesn’t sound like much, but when you multiply that over time, it represents a significant devaluation of your money.

And eventually, you find yourself in a higher tax bracket even though your purchasing power hasn’t risen one iota. In fact, it’s fallen.

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