IN YOUR continuing effort to keep track of the dangerously bad ideas being stitched into the tax bill, you will want to note the indexing clause. The Senate Finance Committee has added it to Mr. Reagan's original bill, over the administration's well-founded objections.
Indexing the tax system means writing into law formulas that would automatically adjust it to the inflation rate. A perfectly indexed tax would remain absolutely constant regardless of the ups and downs of inflation. But a perfectly indexed tax exists only in theory.
A brief recollection: in 1972, Congress decided to index Social Security benefits. It made a mistake, inadvertently double-indexing part of the formula, that proved exceedingly costly. The people who benefited from this error naturally favored perpetuating it, and to make the obvious correction took Congress five years. Indexation is not a simple process.
The Finance Committee takes it for granted that the best measure of inflation is the Consumer Price Index.But the CPI is notoriously inaccurate, and over the past couple of years it has consistently run two or three percentage points higher than the true inflation rate. Under other circumstances it could easily run too low. The consequences of indexation are not easily predictable.
If there are hazards in the basic adjustment of tax brackets, those hazards are endlessly compounded in the indexation of capital gains. The treatment of capital gains is one of those issues that looks simple at first glance -- the Finance Committee operates mainly on first glance -- but less so at each successive encounter. What about the people who, like most large investors, borrow the money that they invest? The interest on the loan is an unlimited deduction from their taxable income. To index capital gains but not interest or debt is a gigantic invitation to borrowing and speculation -- as opposed to saving, the encouragement of which the Finance Committee occasionally claims to support.
The concept of tax indexation draws its support from a mistrust of politics and, especially, Congress. The accusation holds that, because inflation increases tax revenues, Congress will deliberately encourage inflation to generate more money to spend. But there's no such thing as an automatic stabilizer that, in a rapidly changing economy, will be neutral, fair and simple. In fact, throughout most of the past 15 years, Congress intervened regularly and effectively to adjust the system. It is only within the past three years that it allowed inflation to increase the burden beyond the accustomed level. The remedy lies, not in uncertain statistical formulas, but in congressional elections. That remedy has already been applied -- if anything, a bit too heavily.