Overview

tax-based incomes policy


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A policy of using the tax system to reduce inflation through its incentive effects. This is distinguished from the macroeconomic effect of higher taxes in cutting effective demand. The reasoning behind such policies is that if sudden increases in incomes attract punitively large tax rates, firms will choose smaller wage and price increases. The shortcomings are that firms with monopoly power will choose even larger price increases to enable them to pay the taxes, and that such tax policies will encourage creative accounting, and drive economic activity into hidden and untaxed channels.

Subjects: Economics.


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