September 01, 2021

CBO Confirms: Higher Inflation Harms Wages, Increases Tax Burden, & Decreases Investment in America’s Future

WASHINGTON, D.C. – On July 29, 2021, House Budget Committee Republican Leader Jason Smith (MO-08) sent a letter to the Congressional Budget Office (CBO) requesting an analysis of how today’s high rate of inflation – fueled by unprecedented levels of government spending – is driving up prices, negatively impacting the real incomes of working Americans, increasing effective tax rates on the earnings of Americans, and driving down investment and long-term economic growth. Under the Biden Administration, annual inflation is on pace to be the highest since 1981, with gas prices up nearly 42 percent so far this year and food prices up over 3 percent. Washington Democrats – who already imposed nearly $2 trillion in spending earlier this year – are now proposing to spend another $3.5 trillion through a partisan budget reconciliation process that will further ignite the inflation fires.

Today, CBO issued a response to the Smith letter that highlights the negative impact the high pace of inflation is having on all Americans, particularly middle-income Americans and those on fixed incomes. As CBO Director Phillip Swagel wrote in his response, “inflation has eroded the purchasing power of families.”

House Budget Committee Republican Leader Smith issued the following statement in response to CBO’s findings:

“The Washington Democrat spending binge is fueling inflation that is crippling family budgets and forcing Americans to pay higher prices for everyday goods and services. As CBO confirmed today, those higher prices not only effectively eliminate wage increases that workers might see, but they also can increase the direct tax burden on Americans while decreasing the benefit of investing in the long-term economic growth of the country. While Americans are facing the fallout, Democrats are trying to make matters even worse by charging ahead with another $3.5 trillion in spending that will only further fuel inflation. Hardworking Americans do not want higher prices, stagnant wages, and less opportunity or the Democrat socialist agenda that comes with them. President Biden and his fellow Democrats should try focusing less on their so-called ‘legacy’ and more on the crises affecting Americans today.”

Key Points from CBO’s Response:

  • Inflation has recently been growing faster than wages. According to CBO, purchasing power of an hour of work has declined by 0.7 percent over the past year.
  • Inflation increases taxes on parents and seniors.
  • CBO estimates that a 1 percent increase in inflation would increase individual income taxes by 1.1 percent.
    • Middle-income Americans are the most negatively impacted in terms of average tax rate as a result of inflation.
  • Higher inflation reduces the incentive to save and invest, reducing economic output and income.


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