Equity and Tradeoffs in a Tax-Based Incomes Policy

Abstract

A tax-based incomes policy (TIP) is a tax incentive that tries to induce employers and/or workers to reduce and/or price increases. It is intended as a complement to the basic anti-inflation policy of gradual monetary deceleration and fiscal restraint. Its purpose is to reduce the capital stock and output loss that would otherwise accompany such a policy (see my 1978, 1979a articles). This article is divided into two sections. Section I examines the capital stock and output loss under monetary deceleration that is uncomplemented by TIP. This loss is due primarily to wage growth inertia, a central feature of modern capitalist economies. Such inertia provides not only the rationale for a TIP on increases; but also implies that special effort is required to assure that the design of a complete TIP package is fair to labor. Section II analyzes the tradeoffs confronting two alternative methods of making TIP more equitable to labor: profit and/or price restraint insurance; and a TIP on price increases of the largest firms. The original TIP, limited to increases, at first glance is often perceived as unbalanced and inequitable. This section tries to contribute to the development of a balanced equitable TIP.