Government Autopilot

President Obama's budget is out (.pdf), and the first thing that strikes me as entirely sensible is indexing to inflation some of our established tax and spending programs. Instead of arguing eternally over whether or by how much federal Pell Grants should be expanded, they would now automatically rise with the Consumer Price Index (plus one percent, a concession to the ever-increasing costs of higher education). We've done this before with elements of our tax code, and it's an effective solution to policy gridlock.

Prior to the 1980s, our tax code suffered from what's called bracket creep. Our tax brackets were set as real dollar amounts, but inflation would cause salaries to rise into higher brackets than intended. Over time, people slowly paid higher taxes each year until we began indexing our tax brackets to inflation. Bracket creep has been essentially eliminated.

Other programs are not indexed to inflation and thus face similar problems. The Alternative Minimum Tax (AMT) is one such example that's causing problems in today's political climate. The AMT was a response to a 1969 IRS study showing that 155 individuals earning over $200,000 managed to avoid paying any income taxes whatsoever. The AMT targeted these individuals who were escaping their tax burdens, but since it was not indexed to inflation, it has ensnared greater numbers of people each year, to the point that it would have affected millions of taxpayers if Congress had not adopted patches each of the last two years. Those "patches" have replaced sound policymaking. Rather than finding an appropriate level and letting it move with inflation, we have to wait for Congress to debate on changes each year.

Obama's budget would begin indexing the AMT and Pell Grants, but there's no economic or political reason to stop there. The federal minimum wage could also be indexed to avoid the consequences that occur when Congress imposes changes over a short period of time. Republicans in power in the past let the minimum wage erode over time to inflation. Democrats, once back in power, quickly upped the rate. These cycles impose real costs on the economy as businesses adapt to radically higher rates. To keep the minimum wage's buying power at a steady level over time, we should be indexing it as well.

The budget will no doubt be a political ping pong ball in the coming weeks, but this is one provision that should stay. It will set controversial parts of the government on autopilot and avoid recurring debates. Who knows, it might even free up time and airspace to debate neglected policy.