Before Congress enacted indexation of the income tax system, to take effect in 1985, Rep. Barber Conable (R-N.Y.) visited Canada to see how indexation was viewed there. Politicians told him: "Don't do it--you only get credit for it once." But taxpayers thought indexing was, in Conable's words, "the greatest thing since pearl-button spats."
Many Democrats (and a few liberal Republicans) seem determined to make repeal of indexation their principal contribution to social thought in 1983, thereby establishing the contrast between the parties that the president wants for 1984. He has the votes to sustain a veto of any repeal, but Democrats seem duty bound to try. Their budget proposal calls for $265 billion in new revenues through 1988, but the only revenue-raising measures Democrats are eager to discuss are repeal of the third year of the tax cut, and of indexation. Repeal of indexation would raise $90 billion, one-third of the Democrats' total new revenues--assuming what cannot be assumed: an inflation rate of only 4.5 percent. If inflation is higher than that there is a gusher of revenues.
Indexation adjusts brackets to compensate for inflation. It prevents "bracket creep," whereby inflation floats taxpayers into higher brackets so that their real tax burdens increase faster than their real incomes. It denies government a revenue windfall from the inflation government causes. Indexation determines the mode, not the level, of taxation. It means tax increases must be voted, not left to inflation. It means Congress cannot get credit every few years for tax cuts that merely reduce taxes to what they were before the last few years of inflation.
Indexation, although Reagan's most consequential domestic policy change, was not part of his original proposals. It bubbled up from the Republican fermentation in the 1970s, from line soldiers like Rep. Bill Gradison of Ohio. But by making it his idea, Reagan guarantees fundamental change in congressional behavior.
Conable says that in 18 years in Congress he has seen five major income tax cuts and only one temporary surtax increase. The result of all this "reducing"? Federal revenues have risen from about $100 billion to $620 billion. Some of that has been due to real economic growth and social-insurance taxes. But, Conable says, the growth of government has been financed substantially by inflation--by "bracket creep."
By favoring repeal of indexation and cancellation of the third installment of the tax cut (due in July), Democrats forfeit their pose as the party of "fairness." If you earn $200,000, the third- year cut is just 5 percent of your benefit from the entire Reagan cut. But if you earn $25,000, the third year is 40 percent of your total cut. In fact, because of Social Security tax increases and bracket creep, if the third year of the cut were eliminated, only the wealthy would have received, on balance, a tax reduction. Furthermore, indexation is, Conable says, the populist issue where the populists are right: indexation offers nothing for the wealthy, who already are in the top bracket.
Many legislators rejected the president's proposal for a "standby" tax that would be automatically triggered a few years hence if budgetary conditions are bad. Opponents said, reasonably, that such a tax would be an abdication of legislative control. Those legislators should not vote to repeal indexation and leave the blind force of inflation as the nation's principal taxing power. Opponents of indexation say repeal is needed to shrink the deficit. But repeal cannot substantially reduce the deficit unless inflation is re- ignited. Is re-ignition an implied Democratic proposal?
Some conservatives supporting indexation are interested less in equity for taxpayers or governmental due process than in putting sand in the gears of government. They still believe what Reagan's experience refutes--the idea that you can suppress spending by suppressing revenues. But what really shrinks when revenues fall is support for the most important item on the conservative agenda--rearmament.
There is cynicism all around this issue. Many businessmen want indexation repealed because they are afraid their taxes will be raised if we adopt the novel practice of having taxes raised by the legislature, consciously, rather than by inflation, surreptitiously. Liberals who want government to grow and conservatives who say they do not (they do not count the Defense Department as part of government) share a cynicism: they assume Congress will not have the courage to raise taxes by candid action.
Those of us who believe the nation is undertaxed, given the bills it must pay, but who also support indexation as a step toward more honest and intelligent government, thereby acquire a duty. It is the duty to help create a constituency for a kind of courage Congress has not had to show when counting on inflation to generate revenues. Certainly a new era of legislative life begins in 1985: indexing, unlike pearl- button spats, will be permanent.