Tax Incidence and Distribution in a Sraffian Conflict Inflation Framework

This paper discusses the distributive effects of indirect taxes on produced commodities in a Sraffian conflict inflation framework, in which we make use of a simple ‘Corn Model’ to generalize some results from Okishio ([1958]1977) and apply them to the question of real tax incidence. We show that real tax incidence depends on whether the tax rate is levied on basic or non-basic goods and that in the case of a tax imposed on basic goods, different results in terms of real tax incidence depend on different assumptions about how firms increase prices and workers increase bargained money wages. Within this framework, income distribution, real tax incidence and cost-push inflation are jointly determined by the distributive conflict and the relative bargaining power of workers and firms, expressed objectively in terms of the size and frequency of price and money wage increases. From these results, we argue that a reduction in indirect taxes on basic goods could be a desirable anti-inflation policy, as such reduction, even if accompanied by revenue compensating increases in the taxation of non-basics, would increase both the real wage and the real rate of profits, while permanently lowering the rate of inflation.