Effort Afoot to Prevent 'Tax Bracket Creep'

Millions of Americans are subject each year to a sneak tax attack.

When they get a raise, a portion of that extra moola may move them into a higher federal income tax bracket - say from 15 percent to 28 percent. Or from 28 to 31 percent, or 31 to 36 percent.

It can be costly.

Economists Lawrence Kudlow and Stephen Moore several days ago suggested to House Budget Committee chairman John Kasich that he end this annual unlegislated tax increase by indexing tax brackets for gains in real, after-inflation income.

In other words, if average real incomes rose 2 percent in a year, the tax brackets would rise by the same amount. Income tax revenues would grow at about the same rate as personal income. The number of people paying taxes at a specific rate, say 15 percent, would remain steady.

The Ohio Republican indicated he would ask congressional tax experts for estimates on the revenue cost and impact on taxpayers of such a change.

But a Budget Committee spokeswoman says Mr. Kasich's priority is to push for removal of the "marriage penalty" some two-income couples face on their income tax bill.

Tax brackets were indexed to inflation in 1983 under President Reagan. So inflation itself doesn't raise the income tax burden.

Prior to then, federal revenues rose rapidly, especially when inflation was high. Congress periodically gloried in voting a tax cut to shrink the tax burden again and win voter approval.

Annual gains in real income are usually small compared to inflation. So the tax impact for one year is minor - perhaps an extra $15 billion to $20 billion, guesses Mr. Kudlow, chief economist of Mr. Reagan's budget office. But over several years, it compounds and becomes large.

"There hasn't been an income tax cut since 1986," says Kudlow.

Mr. Moore of the libertarian Cato Institute in Washington figures that real income "bracket creep" is one reason why federal revenues have been growing faster than income.

So far this year, for instance, federal tax revenues are up some 10 percent while personal income has risen by only 5 or 6 percent.

(Another factor is high capital gains tax revenues, reflecting the rapid rise in stock prices of the past few years.)

Conservatives like the idea of indexing income tax brackets for gains in real income because it is one way of holding government revenues in line with the growth of the US economy. It would also, they hope, keep government small.

Moore says federal revenues today amount to 20.2 percent of gross domestic product (GDP), the nation's total output of goods and services. This is the highest level since World War II. Together with spending cuts, the rapid increase in revenues have turned a budget deficit into a surplus.

The chairman of the tax-writing House Ways and Means Committee, Bill Archer (R) of Texas, has proposed setting directly a 20 percent ceiling on federal revenues

For the last few decades, federal receipts have varied around 18 or 19 percent of GDP.

Last year's tax bill included a number of tax cuts that are projected by the Congressional Budget Office to shrink revenues to 19.3 percent of GDP by 2003.

In that sense, the indexing of income taxes to real growth in incomes would be "redundant," notes a Congressional staffer on the Democratic side.

Democrats, he adds, are mostly going along with President Clinton's urging that any budget surpluses be used to save Social Security.

"Major tax cuts are not on their agenda," he said.

But last week, when announcing new budget surplus numbers of $495 billion for the next five years, twice the amount previously expected, the president opened the door to tax cuts next year.

Indexing real income growth is considered fairer to lower-income taxpayers than some other Republican tax-cut proposals.

"It is a possible way to cut taxes which does not have bad distributional consequences," says Robert McIntyre, director of Citizens for Tax Justice, a Washington research group. "There are many worse tax proposals out there."

Kudlow, who is now with the insurance company American Skandia, and Moore have proposed that the 15 percent bracket be widened to a taxable income of $50,000 or more and then indexed to real income. Most middle-income workers would thus not pay at the 28 percent level. Currently, single taxpayers start paying the 28 percent rate at a taxable income of $26,000.

Whether Kasich and his Republican colleagues will take Moore and Kudlow's proposal seriously sometime in the future remains to be seen. The growing surplus, now estimated at $1.3 trillion over five years by former Republican presidential candidate Jack Kemp, may tempt them.