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Daniel Shaviro

This chapter addresses issues associated with automatically indexing fiscal policies, such as those in the U.S. income tax and Social Security systems. Under indexing, a statistical measure – pertaining, for example, to inflation, wage levels, life expectancy, or income inequality – is used to determine changes to nominal legal rules that then take effect automatically. One possible reason for favoring automatic indexing is that it may keep the underlying policy, by some metric, the same as empirical circumstances change. While indexing often makes sense from the standpoint of a policymaker whose long-term preferences it would keep in place barring further legislative action, identifying the set of current policies that one might want to perpetuate (or change) can be surprisingly difficult. The chapter explores broader conceptual issues pertaining to policy continuity and competing objectives when legislation remains on the books indefinitely, with particular reference to examples drawn from the history of the U.S. income tax and Social Security. Keywords: automatic indexing, inflation indexing, long-term budget policy, timing of legal intervention, policy change, tax reform, Social Security reform