Tax indexing

Indexing the tax code to offset "bracket creep" -- i.e., the increase in taxation caused by inflation of income -- is neither an untried nor undesirable long-range objective. Indexing has been successfully applied in Canada and some European and South American nations, as well as Israel. It is used to help offset the impact of inflation on wage earners who receive increases to compensate for diluted money and are thus propelled into a higher tax bracket. Within the United States, at least nine states now index their state tax codes.

While there is much to be said for eventually moving toward some form of tax indexing in the US, there is a legitimate question as to whether lawmakers are going about the proposal in the most orderly way. Senate Republicans have included an indexing formula in their version of the 1981 tax bill being fought out in Washington. Under the Senate plan, which won in that chamber on a 57-40 vote, indexing would take effect in 1985 -- although it is attached to the current bill. The Reagan administration, while not inhospitable to indexing, would prefer that it be deferred to a later tax measure.

The administration is on solid ground in urging a delay of the proposal at this time.

Indexing, to be sure, has merit. The "windfall" tax gains for the federal government growing out of bracket creep are particularly unfair, since lawmakers are able to fund their pet programs while avoiding the public displeasure inherent in formally approving new tax increases. In that sense, indexing would be an important step in encouraging accountability for federal expenditures.

But the administration insists that inflation will decline in the months ahead once its new economic program begins to take effect. As a matter of fact, the inflation rate has already eased off somewhat, though whether that proves long-lasting remains to be seen. In any case, inasmuch as the Reagan administration and the Federal Reserve Board seem adamant in wanting to lower inflation, why then the pell-mell haste in moving on indexing now, particularly since the measure will not even come into effect for four years?

Of course, there could be a reason for the administration's tepid reception of what has hitherto been bullish Republican support for indexing. The Reagan team may be hedging its own bets about inflation and the size of those federal deficits that are supposed to drop in the next several years. What if they don't? What if the tax cuts lead to larger deficits? Having unanticipated tax dollars on hand -- from bracket creep -- could be a comfortable cushion from the government's perspective.

That possibility aside, however, what is particularly disturbing about the current indexing provision is that it is tied to the Consumer Price Index, which itself distorts the inflation rate by putting undue stress on housing costs. The government already links close to half of all federal benefit outlays to the CPI. Many private labor contracts are also linked to the price index. Would it not be wiser for lawmakers to move first on reforming the CPI before tying a huge new "constituency" to a dubious statistical measurement which is already distorting the US inflation rate?

Lawmakers should rethink the method and timetable of the Senate provision, which unnecessarily complicates enactment of the administration's tax plan. With 1985 still well down the roadway, legislators have time to put together a better in dexing formula.

of 5 stories this month > Get unlimited stories
You've read 5 of 5 free stories

Only $1 for your first month.

Get unlimited Monitor journalism.