OF ALL the congressional decisions being made in haste this historic July, none is likely to be more regretted in the leisure of future years than a decision to build automatic inflation-linked cuts into the income tax system. The Senate has already voted to adopt such provisions, and sentiment is building in the House for a similar measure.
Experience over the past several years has provided ample evidence of the dangers of building self-triggering inflation adjustments into anything -- social insurance programs, wage settlements or, specifically, tax systems. Some of the problems are technical -- which index to use, for example. The Consumer Price Index is a useful statistical standard, but it was not designed to provide a measure of the actual cost-of-living for the purposes of any particular government policy. The CPI has been justly criticized for exaggerating the effect of inflation on Social Security and other indexed programs. Yet this is the index the Senate now proposes to use in adjusting tax brackets and other features of the system to keep inflation from increasing tax burdens.
Choosing the right index is just one of many technical difficulties. Mistakes made in 1972 when inflation adjustments were built into Social Security have added substantially to that program's financial troubles and are still not fully corrected. Yet indexing the Social Security system seems simple compared with the task of correctly adjusting all the dimensions of the tax system -- and foreseeing all the consequences of these adjustments.
Still more serious is the loss of fiscal control that tax indexing entails. The notion that Congress has been fanning inflation to generate revenues for a spending spree is sheer nonsense. As Sen. Ernest Hollings pointed out on the opposite page last Sunday, inflation-driven increases in taxes have lagged well behind the corresponding increases in those parts of the budget that are explicitly or implicitly linked to the price level. Congress has shown itself fully capable over the last decades of legislating tax cuts sufficient to offset "bracket creep." What recent Congresses have not mustered the courage for is voting income tax increases when they are needed to cover unanticipated surges in government requirements.
Several states already have some inflation-proofing built into their income taxes, though not, typically, a full CPI adjustment. Colorado, where the economy has remained relatively strong, is enthusiastic. Other states, like Minnesota, however, have come to realize that there is no guarantee that the price of essential government services will move in lockstep with the CPI. The federal government, with its heavy commitment to defense, an expenditure that consistently outpaces the general price level and its large indexed social programs, is still more vulnerable. Suppose, for example, that an OPEC oil price rise jerks the CPI upward, pushes the cost of military obligations still higher and triggers a cut in taxes -- all of this becoming apparent in the fall of the one out of two years with an election. What would happen? Further cuts in the non-indexed parts of the budget might be rushed through, but a bigger deficit is a much better bet.
Legislating a massive three-year tax cut in an economy as uncertain as the present one is folly enough. Sharply limiting the freedom of future Congresses to deal with whatever failures of current policy or unforeseen shifts may emerge is mid-summer madness.