Administrative Problems of Tax-Based Incomes Policies

Abstract

Tax-Based Incomes Policies ALTHOUGH 1977 was a good year economically, unemployment and inflation are still serious problems. Over the last few months the outlook for inflation has worsened. Many believe that traditional monetary and fiscal policies will not be sufficient to do the job, as George Perry makes clear in his paper in this volume. And as Laurence Seidman suggests, novel tax incentives or disincentives are being advocated to provide a carrot or a stick to hold down wage and price increases. These tax-based incomes policies (TIPs) would permit a more aggressive use of monetary and fiscal policies without having to rely on direct controls to moderate wages and prices. While there has been some public discussion of the merits of various tax-based schemes such as those put forth by Arthur Okun or by Henry Wallich and Sidney Weintraub, little attention has been paid to the details of implementing them.1 This paper focuses on the administrative problems of TIP. A workable scheme must permit the Internal Revenue 1. Two exceptions are unpublished papers by Gerard M.

Excess Wages Tax

“…The definition of wages has to be all-embracing to prevent circumvention using special bonuses, pension fund payments, contribution to vacation funds, rent payments, free meals, transport costs, and so on, as observed in Russia. As noted by Dildine and Sunley (1978), "( experience with wage measurement problems of the income tax suggests that I/ This extremely controversial tax applied to wages and profits, was suspended in September of the year it was introduced, forgiven for the first two quarterly payments, reintroduced in 1976 but not applied, introduced again in 1977, and again not applied, and finally, like the Cheshire cats' grin, faded from view forever; see de Wulf (1986) and Chand (1981Chand ( , 1986 for descriptions. This emphasizes the difficulty, experienced in most countries reviewed in this paper, of administering this tax in the face of intransigent non-compliance.…”

Optimal Taxation of Inflation

“…At the 25th Panel on Economic Activity organized by the Brookings Institution in 1978 on how to cure inflation, TIP was the most debated issue and the discussion was centered around its optimal design (Okun and Perry, 1978): should TIP be based on price increases or on wage increases, paid by employers or by employees, paid by all firms or only by large firms, be continuous or discontinuous, be a penalty for large increases or a reward for moderation? Dildine and Sunley (1978) argue in favor of taxing wage changes at large private corporates to minimize administrative costs and in favor of a penalty instead of a reward since rewards would have to apply to all firms to avoid preferential treatment. They recommend against exemptions of overtime and bonuses and support a hurdle which is easier to audit rather than a continuous tax.…”

“…An argument against TIP is that it would be costly to implement because the tax administration would have to collect additional information from all firms. A solution that would limit these costs would be to apply TIP only to very large corporations (Dildine and Sunley, 1978).…”

Tax‐based Incomes Policies: Will they Work? Have they Worked?

“…One problem with the Wallich-Weintraub scheme is that there may be instances where firms stand to lose very little by the imposition of a higher tax rate on their profits (Nichols (1979)), because they pay no corporate income tax.5 One solution would be to tax firms directly on the portion of their wage bill regarded as excessive, orin other wordsto impose a penalty payroll tax (Dildine and Sunley (1978)). This is the line followed in the recent British proposals of , Jackman and Layard (1982), and Layard and Nickel1 (1986), who suggest that the government declare a norm for the rate of growth of hourly wages.…”