Economic Report of the President

ard or that thought the administrative costs of compliance were toohigh would not be required to keep records. In contrast, under acontinuous TIP that penalized firms or workers above the standardas well as rewarded those below, all firms would have to keep detailedrecords and would have to file additional schedules with theirtax returns.A reward-only continuous TIP would eliminate record-keeping requirementsfor noncomplying firms, and, as emphasized above, itwould also be more equitable than a continuous TIP that includedpenalties. Such a TIP could offer tax credits, for instance, of 3, 2, or1 percent of earnings, to employees of firms with average pay raisesthat did not exceed 50 percent, 75 percent, or 100 percent of thestandard. However, even this simple continuous TIP would probablygenerate more disputes than a hurdle TIP, since firms would have incentivesto understate their pay increases to appear to be in a lowerbracket. Under a hurdle TIP, only firms near the standard would facesuch incentives.The final major issue in designing a TIP is whether it should bepermanent or temporary. The answer seems to be that a permanentTIP would not be feasible because of the distortions it would createby discouraging changes in relative wages. A TIP might introducefurther distortions as people changed their behavior to circumventthe intent of the policy while remaining technically in compliancewith the standard. For a while the distortions created by a carefullydesigned TIP would probably be small. But as relative prices andwages wandered farther from equilibrium levels, the distortionswould become larger and the effects on inflation smaller. The economiccosts from the distortions of an effective temporary TIP wouldbe acceptable when balanced against the larger costs of relying solelyon demand restraint to lower inflation. Because the distortions wouldbuild up over time, however, the costs of a permanent TIP wouldeventually exceed benefits.On balance, given all the foregoing economic and administrativeconsiderations, a temporary hurdle TIP—a tax credit to groups ofworkers whose average pay increase does not exceed a specifiedstandard—seems superior to the other variants. Because keeping recordsand complying with the standard would be voluntary in this typeof TIP, firms that found the administrative costs too high couldchoose not to participate. As with all forms of TIPs, relative wagechanges could still occur in response to economic and other developments,although increases in excess of the standard would "cost"workers the TIP tax credit. The efficiency costs would be small atfirst, but over time the distortions of the TIP would rise and its effectivenesswould fall.63