In Chapter 11, which dealt with interest incomes, it was found that the available evidence indicated that economic agents, at least over the period covered by the statistical analysis, suffered from fiscal illusions. This meant that the market rates of interest did not adjust enough for the effects of inflation and taxation to leave lenders with unchanged real incomes and borrowers with unchanged real costs. Borrowers were definitely the gainers from inflation. This result was not considered surprising, because it was associated with a type of distortion – that of the taxable base – that has not been obvious, until very recently, even to economists.

For wages, however, the basic tax-related distortion is strictly the result of the progressivity of the income tax. In Chapters 2 and 3 of this study we saw that the distortions caused by progressivity (1) are far simpler to understand than those in the bases, (2) have been known for a long time, and (3) have been dealt with by many countries – through indexation or tax-cut policies. In view of this, it would be strange if wage earners – especially members of national unions with research staffs – suffered widely from progressivity-related fiscal illusions; or, if they did not, if they made no attempt at protecting themselves from the effect of higher marginal tax rates by bargaining on the basis of net-of-tax wages.