Economic Report of the President

Although the flexibility of TIPs makes them attractive, using thetax system to reduce inflation poses serious administrative problems.These problems present the major obstacles to designing an effectiveTIP program. The following sections discuss issues of design in somedetail, and a Technical Appendix to this chapter examines otherproblems in measuring average pay increases.Several choices must be made in designing a TIP. First, should itdispense rewards or levy penalties? Second, should receiving thepenalty or reward depend only on being above or below the standard(a "hurdle" TIP), or should the size of the penalty or reward begraduated in accordance with the difference between the standardand the actual pay or price increase (a "continuous" TIP)? Third,should the TIP be a permanent or a temporary program? Finally,should the TIP apply to pay, to prices, or to both? These choices requirestriking a balance among equity, efficiency, administrative ease,and effectiveness in reducing inflation. The next section discusses thefirst three choices in the context of a pay TIP, and presents estimatesof the cost and effect of a specific pay TIP. Another section discussesprice TIPs.Varieties of Pay TIPsFor several reasons, a reward pay TIP is probably preferable to apenalty pay TIP. A reward TIP encourages workers to cooperate witha voluntary incomes policy by compensating them for acceptinglower nominal pay increases than they would otherwise receive. Apenalty TIP, whether levied on firms or on individuals, will tend toundercut the spirit of cooperation necessary for a successful incomespolicy. This is especially true because incomes policies are oftenthought to be more effective in restraining pay increases than inlimiting price or profit increases. In addition, although lower rates ofincrease in wage rates and unit labor costs eventually result in lowerprice increases, the effect is not immediate. In the short run, wagesmay increase more slowly but prices might not. Workers would thereforebe more willing to cooperate with an incomes policy that partiallycompensated them for accepting, at least in the short run, lowerreal incomes than they would have earned in the absence of a TIP.Since a reward TIP provides such compensation, at least in part ifnot in full, it would be both more equitable and more acceptable toworkers than a penalty TIP.Furthermore, a penalty TIP has other drawbacks. If levied againstfirms, it might increase the rate of inflation. Some of these firmswould be able to pass on the cost of the TIP penalty to consumers,especially if the above-standard increase were industry-wide. Someprices therefore would rise as a result of the TIP. Levying the penaltyon individuals rather than firms raises different objections. Such a333-5H0 0 - 81 - 5 : QL 3 61