Tax Based Incomes Policy

Nick Rowe wonders why no one talks about price controls any more. I think this is related to his discussion of the gigantic influence of Milton Friedman on new Keynesian macroeconomics. See also this.

Due to the same exchange, I recall tax based incomes policy. IIRC Paul Samuelson and especially Robert Solow were quite enthusiastic about this. The idea is to penalize wage increases with a special extra payroll tax on employment times the change in wages. In simple models, this causes reduced inflation and no other changes.

After the Volcker deflation, I didn’t hear much about tax based incomes policies. I was a discussant of a paper on the Polish transition from communism to a market economy. The author noted that Poland had a problem with inflation and tried a tax based incomes policy. He said it worked very well.

The point (if any) of this post is that it should work equally well if one wishes to increase inflation. A subsidy for wage increases could be a way to prevent deflation. The idea would be something like replacing the payroll tax with a tax on what payroll would be if last year’s wages were paid to this year’s employees.

I’m not sure if this idea is totally insane or just impractical and irrelevant to the current debate. It seems backwards. Then again, lots of things seem backwards when one discusses policy for economies in a liquidity trap.