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.
I think this idea has merit. You could fight inflation of different types by adjusting taxes appropriately.
For example , if incomes of millionaires and billionaires were inflating too rapidly , you would boost the taxes on those incomes. Similarly , if lower level incomes were flat or deflating , you would reduce the tax or subsidize those incomes.
We can call it the Progressive Income Tax.
Let’s give it a try !
I’m all for progressive income taxation (note the US tax code federal plus state plus local is only very mildly progressive). But the crazy tax based incomes policy is different, because the tax or subsidy depends on the change in wages not the level of wages.
In Noah’s comments I pointed out what the most successful form of incomes policies has been historically, although it is most certainly not applicable to the US, where TIPs might be the alternative. This is corporatist “collective collective bargaining,” where the leaders of labor and of industry get together, with or without someone from the governmnet, and agree on a nationwide set of wage and price increases.
Where does this work? Well, smaller, homogeneous nations with very open economies, a high rate of uniionization in their export industries in particular, with not many companies involved. Two that did very well with this during much of the postwar era were Sweden and the actually existing Austria. If one measures short run macro performance by the misery index, UR plus IR, they were at the top of the whole OECD, ahead of supposedly monetarist West Germany and Switzerland, although both of those have elements of this sort of bargaining.
It broke down substantially, although not toally, in Sweden in 1986, but is still largely in place in Austria, which continues to have one of the world’s lowest misery indexes, although I think Switzerland may be ahead of it nos.
@Barkley Very true.
Going to numbers, there is the union inverted U with OK results for very low or almost universal union membership.
It helps if the union leaders, the government officials and the capitalists are all social democrats. However, Austria manages with a rather broad political spectrum.
My snark wasn’t directed at you , sorry if it came across that way. I’ve been watching some of the Davos proceedings and find it distressing that while “insufficient demand” is widely recognized as a problem , any talk of increasing the incomes of those with a higher MPC seems to be strictly forbidden. Some solutions to the problem are simply not on the table.
” But the crazy tax based incomes policy is different, because the tax or subsidy depends on the change in wages not the level of wages.”
Yes , this would only work if it was applied differentially across the income distribution. Imagine if we’d had a tax policy since 1980 where incomes were binned each year – say top 1% , next 9% , remainder by deciles – and real wage increases in each bin that were in excess (below) economy-wide productivity growth were taxed more heavily ( subsidized ) , with bin-dependent rates. Depending on the rates used , the changes in inequality could have been moderated to any desired degree ( or eliminated entirely ). You’d need something similar on the capital income side to close that loophole , of course.
To a large extent , this was what unions did , and why they had to be destroyed to make the world safe for the 1%.
I didn’t have the impression that the snark was directed at me.
This is actually a wonderful idea: make all raises tax-free for a year. In a formal model you might get the result that, due to implicit contracts, the expected PV of the wage remains almost the same (essentially the tax subsidy) while the first-year wage falls. But I don’t believe this model. For one thing, tenure is uncertain and endogenous in a non-modelable way. In any case, give it a try and see what happens.