'Indexed' taxes: the lid's on, will it help or hurt?
Of all the bright baubles on the "Christmas tree" tax measure emerging from Washington, the proposal to index personal income taxes may be the one with the most attractive wrapping. But it also has the most uncertain contents.Skip to next paragraph
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Depending on which economist or politician you believe, indexing will either dampen inflation or make it worse. It will help those of lesser means or harm them. It will make elected officials more responsible or less responsible. The one point agreed upon is that indexing is revolutionary, that it will significantly change the way Uncle Sam raises money.
Under the administration-approved package passed by the House and Senate, income tax rates, the personal exemption, and the zero-bracket amount (standard deduction) will be adjusted to offset inflation as measured by the consumer price index (CPI). This will occur each year beginning in 1985.
This means that taxpayers should not be affected by "bracket creep," whereby inflation bumps them into higher tax brackets (where they must pay relatively more) even though their real buying power stays the same. In effect, indexing is a permanent tax cut that cannot be eroded by inflation.
Allowing bracket creep to continue, says American Enterprise Institute economist William Fellner, "really has no justification."
"A nonindexed structure gives the government an incentive to continue inflation," says Dr. Fellner, who was a member of the president's Council of Economic Advisers from 1973 to 1975. "It removes a discipline from government practices."
It also tends to more adversely affect those of lesser means. Noting government studies showing this. Sen. William L. Armstrong (R) of Colorado says , "The real victory in indexing will be for low-income earners." Many liberals agree.
The National Taxpayers Union figures that bracket creep will add $17 billion to federal coffers in 1981 alone, providing a government "windfall" at taxpayers' expense without politicians having to take responsibility.
What Congress hasm taken credit for is the half-dozen "tax cuts" enacted since 1969. In fact, say critics, these adjustments only offset a portion of bracket creep for which lawmakers themselves were to blame.
"It is time to abandon that cushion and get on with the job of responsible and antiinflationary fiscal management," says Sen. Bob Dole (R) of Kansas, chairman of the Senate Finance Committee.
But does income tax indexing force more responsible action on Capitol Hill or merely remove options for the future?
With wide public support, lawmakers in recent years already have indexed to the CPI many government payment programs, including social security, federal salaries, military pensions, food stamps, and others. Some observers feel social security is in big trouble today largely because it has been indexed since 1972. Rather than adding more indexing to the nation's economic system, these critics say, lawmakers should be trying to cut it back.