Tax-Based Incomes Policies

In this chapter we examine various suggestions for controlling incomes and prices by means of taxes. The original tax-based incomes policy (TIP) proposal of Wallich and Weintraub (1971) imposes tax penalties on firms which make excessive wage increases. It is argued that this stiffens the resistance of firms to inflationary wage claims, resulting in lower settlements and hence lower costs and lower inflation. However, this relies on a cost—push view of inflation. If the rate of inflation is determined by the rate of monetary growth in the long run, then, since the TIP does not affect monetary growth, it cannot have a permanent effect. Instead the TIP can only alter the transition path of inflation as it moves to its steady state value. However, the TIP does alter the nature of the firm′s budget constraint and so influences real decisions. An appreciation of this point has resulted in the recent suggestion of using a TIP as a method for reducing the natural rate of unemployment.