Indexation on gross income (i.e. on W) agrees better with economic intuition, since taxes need not be a real burden, when they generate goods that enter the utility function. However, some taxes can be wasteful or can be discarded for other reasons. In the following we will take a middle position, adding and substracting income elements. In particular:
· some public goods Q are provided by nature: breathing air and the berries in the field
· taxes go into public goods Gp, that subsistence workers get for free too (as licensed free riders)
· some government expenditure Gs may benefit only special interest groups (wastefully)
· some government expenditures Gn actually benefit the average tax payer, and should be considered part of ‘net income’
· some taxes go to the support of the unemployed - B U - which the unemployed cannot provide for themselves
· there is the possibility of different consumption baskets (different deflators)
· it is recognised that people at subsistence tend to have more sweat and less leisure
· tax revenue can change disproportionally with income.
Considering these element, it seems that the adoption of a detailed index would likely cause little difference with gross income indexation. Many of the additions compensate for many of the substractions. Also, if subsistence were to lag behind average income, then it might well happen that subsistence is increased at some point anyway.