INDEXING the income tax to inflation -- which means building in automatic adjustments -- is, on the whole, a bad idea. It's too bad that a number of prominent Republicans, including the president-elect, have committed themselves to it in such explicit terms. Paradoxically, the present high inflation rates were iluminating dangers in indexation that were far less apparent at lower levels.
Fiscal conservatives see indexation as a device to hold down federal spending. Inflation pushes people into successively higher tax brackets even when their real income is unchanged. That promises the government a steadily higher share of the national income and, aggrieved taxpayers argue, only incites Congress to think of new ways to spend it. The campaign for tax indexation is another expression of mistrust of Congress and politics. Like the proposed constitutional amendment to require a balanced budget, it's an attempt to invent a method of mechanically curtailing congressional discretion.
Ideally and theoretically, indexation would adjust all of the exemptions and brackets of the income tax law so that people's taxes would remain unchanged, in relation to their real purchasing power, regardless of inflation's ups and downs. That's a nice idea. But, first of all, how would you prefer to measure inflation? At lower rates, it made little difference. But now, the divergence among the various statistical definitions is enormous. Most people think first of the Consumer Price Index as the basic measure, but economists generally prefer a more subtle indicator called the gross national deflator. One of them went up 13.3 percent last year, the other only 8.8 percent.
What, precisely, ought to be indexed? Indexing the exemptions favors taxpayers on the lower half of the income scale. Indexing brackets and capital gains favors people on the upper half. Indexing both over-compensates most people.
Inflation affects different kinds of income differently. The interest on your savings account isn't really income at all, since it's hardly enough to maintain the value of money earned earlier -- on which you've already paid income taxes. Should it be indexed by the same formula as income from wages? These points are not mere technical quibbles. They are questions of equity as numerous, and as difficult, as the endless provisions of the tax law they would try to modify.
For all of its faults, the process of regular political review, by the administration and Congress, is the best -- and perhaps the only -- way to maintain a reasonably fair, reasonably effective tax in times of high and fluctuating inflation. To try to build an automatic pilot, and let it steer this gigantic system into the future, as though the designers could foresee what might happen to the statistics and to the economy itself, strikes us as positively perilous. There is no automatic pilot that can make tax policy. The only way to keep the tax system up to date is to require the president and Congress to keep reviewing it and revising it. That's a crucial part of the job that the voters hired them to do.