A similar approach could possibly be used regarding prices or profit margins, the intent being to use tax incentives to moderate people’s behavior. In theory, this “carrot and stick” approach would curb cost-push inflation by providing incentives to people and businesses to moderate their wage and price increases. In fact, people would gain economically by accepting smaller wage increases, due to the tax advantages of doing so. After a decade of futile attempts to curb inflation, the TIP proposal attracted considerable favorable attention, and appeared to be the most likely variant of controls to be attempted in the 1980′s.
The concept of TIP is attractive. However, its application in reality, and especially to the Canadian economy, leaves many unanswered questions. How could TIP (or any policy) hold down prices when such a high proportion of Canadian consumer goods is imported, and oil and energy prices are rising dramatically as in the early 1980′s? Thus, TIP like the AIB, would likely have the effect of holding down wages more effectively than prices. However, to provide enough incentives for people to hold down their wages in the face of rapidly rising prices would require that the government give significant tax reductions to workers, which would require significant reductions in federal income tax revenues. What effect would these have on an already very large federal budget deficit, and how would the increase in the budget deficit (estimated modestly at $3 billion per year in the early 1980′s) be financed? Since it would be foolish to increase the money supply, considerable amounts of Canadians’ savings would have to be diverted from capital investment and borrowed instead by the government. If, on the other hand, the TIP program were to stress tax penalties for those who increased wages or prices excessively, how would it overcome the problem of evasion that is associated with any controls program, especially with respect to prices?
An internal finance department document was reported as advising the government that TIP would be an administrative nightmare if applied to all workers and all companies, and unfair if it did not. The finance department pointed out that existing personal and corporate income tax forms did not provide adequate information for administering a TIP program, so that new federal bureaucracy would have to be established, with extensive compulsory reporting requirements such as those that generated severe problems with the Anti-Inflation Board from 1976 to 1978. Also, the report expressed concern that if the TIP program penalized employers for granting excessive wage increases in order to stiffen management resistance to unions, the result could be a deterioration in labor-management relations and more strikes.
Thus, the TIP proposals do not represent a simple answer to the problem of inflation, and, if adopted, are unlikely to live up to the high expectations that many observers seem to hold for them. Nevertheless, the fight against inflation has proven so long, and so frustrating, that it seems likely that some variant of TIP will be attempted, for want of a more attractive alternative.
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