Tax Policy and Erroneous Information: An Analysis of the Interaction of Inflation, Indexation, and Income Averaging.

Congress substantially modified the income averaging provisions in 1984 to correct what it believed to be serious problems in the law. In its Committee Report on the Tax Reform Act of 1984, Congress contended that taxpayers were reaping unintended savings as a result of the interaction of the income averaging provisions and inflation, the effect of which would be magnified by indexing. This study evaluates the validity of this Report under a wide array of economic and tax assumptions. The results suggest that Congress's concerns were either irrelevant, mathematically incorrect, or founded on erroneous information. Such findings are offered in the hope that future tax legislation will be based on more reliable information.