The Effectiveness of Using the Tax System to Curb Inflationary Collective Bargains: An Analysis of the Wallich-Weintraub Plan

For several years prior to the 1971 enactment of wage-price controls, the persistent U.S. inflation kindled much discussion of incomes policy. Among the interesting proposals which emerged, one of the more novel was a prescription for using the tax system to curb inflationary collective bargains. This approach was at first advocated separately by Henry C. Wallich (1970a, 1970b) and Sidney Weintraub (1971), who later collaborated in outlining a tax-based incomes policy (TIP).1 Following a history of frustration in other attempts to improve the long-run tradeoff between high employment and price stability, such proposals warrant serious attention. The purpose of this note is to analyze the economic incentives that TIP would provide, in order to identify conditions under which it would succeed, in theory, at holding down both wages and prices (Sections III and IV). Brief consideration is also given to the equally important practical aspects of designing and administering a set of efficient and equitable tax rules (Section II). The effectiveness of TIP is argued to be ambiguous in theory, insofar as it depends primarily upon assumptions which are not easily verified. In addition, several practical difficulties are noted.