Keep tax indexing
With the release of the consumer price index for September, all the necessary ''accounting'' elements are now in place for a major change in the American tax structure: tax indexing, which will formally start up for the 1985 tax year, beginning Jan. 1.
Tax indexing - which is already part of the Canadian tax system - is one of a series of changes favored by tax reformers. Indexing is long overdue. Under the reform, tax brackets and exemptions are automatically adjusted so that a taxpayer's tax payments do not go up when he is given pay increases that merely offset the cost of living. In other words, indexing protects against unlegislated tax increases through ''bracket creep'' - being pushed into a higher tax bracket every time a person gets a pay raise.
The indexing formula is based on the inflation rate for the preceding October-to-September period. Since the consumer price index rose 4.1 percent for the 12-month period ending Sept. 30, tax tables will be adjusted to account for that inflationary increase.
Although the importance of indexing is recognized - it particularly protects the middle class - there is another aspect of the issue that Washington must deal with.
Indexing is but one side of the coin, namely, tax revenues. But federal expenditures need to be brought under control as well.
Federal tax revenues have shown remarkable stability during the past decade. During the Carter years, tax revenues went up by some 1.9 percent of the nation's gross national product (GNP), reaching 20.1 percent of GNP in 1980. Under the Reagan administration, they have come down slightly, to around 18.5 percent of GNP.
Federal spending, however, has continued to increase. Total expenditures added up to 22.7 percent of GNP in 1976 under President Ford. They rose slightly , to 22.9, percent under President Carter in 1980. This year, under President Reagan, they are reaching an estimated 24 percent of GNP.
It is for just such a reason that Walter Mondale has wanted to defer and limit indexing. Mr. Mondale is on target in arguing that the deficit must be reduced. But that does not mean that indexing by itself should be deferred. Would lawmakers really be inclined to restore indexing, if it were deferred? Further, tax indexing, once begun, forces lawmakers to balance the political disadvantages of raising taxes against the political disadvantages of cutting expenditures.
Federal expenditures, still rising at rates well above inflation, have to be brought under control. That means reducing costs for certain middle-class entitlement programs, such as farm supports and veterans programs. It especially means reducing the rate of increase in defense spending. But tax indexing should begin as scheduled next Jan. 1.