AT FIRST glance, indexing the income tax rates seems to be the most agreeable and self-evident of new ideas. Only, look out. It's not a new idea and, as you begin to take a second look, it gets less self-evidently acceptable. Sen. Robert J. Dole, who will be chairman of the Finance Committee in the next Congress, chides this newspaper for its new that indexation means trouble. Mr. Dole's letter, appearing elsewhere on this page, raises points that will be important in the debates over next year's tax bill.
Indexation means linking the income tax rates directly to the inflation rate, to prevent inflation from pushing people into higher tax brackets. Let's try a couple of examples. Suppose that Congress tied the tax brackets to the most familiar -- although far from the most accurate or reliable -- measure of inflation, the Consumer Price Index. Because of the things that it counts and the way that it counts them, the GPI jumps upward whenever home mortgage interest rates rise. If the Federal Reserve Board tightened the money supply to slow down inflation, an indexed tax system would automatically raise the brackets -- producing a tax cut to compensate for the higher rates. Does that sould like a method for slowing down inflation?
If there were another oil crisis and the cost of imported oil rose again, that would transfer more wealth from this country to the exporters abroad. But an indexed tax system would respond with another tax cut, trying to compensate Americans for some of that loss -- at the expense of the federal Treasury. Again, that could only add to the momentum of inflation.
The case for indexation is that inflation, by throwing people into higher tax brackets, generates a flood of new revenue that an irresponsible Congress will only spend. But in practice, it's abundantly clear that limiting revenues does not necessarily limit spending. Otherwise, the budget would not have been running large deficits, in good years as well as bad, through most of the 1970s. The only way to restrain spending is to deal with it directly.
There is one exception to this argument against indexation, and it involves the depreciation of industrial equipment. The Senate Finance Committee, we should observe, has given a good deal of attention to the need for a better depreciation formula. At present, companies can recover only the original cost of equipment -- which, in time of high inflation, may be only a fraction of its real value. It would be fairer, and better for the health of American industry, to base depreciation allowances on the replacement value of equipment. That means adjusting past investment for past inflation. It would be a very different matter to proceed to general indexation and try to tie current income tax rates to current inflation.