Tax-Based Incomes Policies

Seidman, Laurence S.
June 1978
Brookings Papers on Economic Activity;1978, Issue 2, p301
Academic Journal
This article analyzes the probable effects of tax-based incomes policies. The author sees an analogy between private decisions to pollute and private decisions to make inflationary wage and price increases. In either case whether an action is taken to dirty the air or raise the price level, the decision-maker may harm the welfare of others. Yet, the free market does not provide an adequate incentive for him to take these external consequences of his behavior into account. A tax on either polluting or inflating can correct this distortion by charging the decision-maker for those social costs. Acting in his own self-interest, once the tax is in effect, he will make decisions that reflect the social interest in either clean air or a stable price level. In either case, the same shift toward socially desirable behavior can be accomplished by a subsidy, a negative tax, as by a penalty tax. This possibility of utilizing a carrot as well as a stick approach is reflected in the risks of alternative tax-based income policies. The ultimate objective of tax-based income policies is to bring down and control the increase of prices. The author argues that this objective is best accomplished indirectly by a tax-based income policy that curbs excessive increases in wages.


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