Designing a tax incentive scheme: The case of a wage tip

Governments are constantly attempting to use their tax systems for purposes other than the collection of revenue. Each such use entails difficult decisions of both design and administration. Consideration of a tax-based policy that might reduce wage inflation-a so-called TIP-serves to reveal the wide range of difficult choices that need to be made. In addition to problems of measuring the behavior of the tax payer who is to be benefited or penalized, the analyst must settle on such questions as whether the program should be permanent or temporary, whether it should emphasize rewards or punishments, and whether it should be administered by existing government agencies or by special agencies. None of these problems is insuperable. But lurking behind all of them is the question whether, is the end, the chosen policy will actually contribute to reducing wage inflation.