Sen. Armstrong (R-Colo.) and others present elsewhere on this page their disagreement with our discussion of income tax indexing in Minnesota and their own thoughtful arguments for indexing. Why should the government get a windfall from inflation?, they ask. Shouldn't government have to ask for new taxes when it wants more money?
The problem is--and this was our main point--it just isn't that simple. As an abstract idea, indexing has great virtues, but in practice it seems not to provide an automatic answer to the difficult problems of taxation and government spending in an inflationary era. The fact that Colorado, which has a relatively small population and substantial economic growth, has not experienced problems with indexing is an argument worthy of some weight in the balance. We give more weight to the experience in Minnesota, where there have been many problems. These include over-indexing, which gave taxpayers an unintended tax cut and left the state treasury with an unintended shortfall. They include a major substitution of the sales tax for the income tax, which is not what voters thought they were endorsing when they elected Gov. Quie and a Republican legislature in 1978. Such problems are likely to recur when indexing is used.
Sen. Armstrong was a major sponsor of the 1981 law, passed in the struggle over the Reagan tax cuts, to compel federal income tax indexing in 1985. He is perhaps being modest in not stressing his role and the fact that this change is almost certain to have momentous effects. In the past decade, critics of various reforms have argued that well-intentioned laws, for which attractive arguments could be made, almost always turn out to have unintended and sometimes disastrous consequences. We fear that federal income tax indexing is likely to have such consequences, and that the Minnesota experience gives some hint of what those could be. Sen. Armstrong and others seem to expect fewer problems. Unless Congress reconsiders indexing, the answer will be available for all to see in a few years.
In the meantime, we cling to the belief--which is surely shared by our correspondents--that the best solution would be to reduce inflation so that real tax rates would be stable from year to year without any adjustment. The experience of foreign countries suggests strongly that indexing removes some of the political incentives to fight inflation. This, like other arguments for and against indexing, was not aired widely when Congress rather suddenly adopted it last year. The discussion needs to go on.