Working Paper: CEPR ID: DP3437
Authors: Fiorella De Fiore; Pedro Teles
Abstract: We determine the optimal combination of taxes on money, consumption and income in transactions technology models where exogenous government expenditures must be financed with distortionary taxes. We show that the optimal policy does not tax money, regardless of whether the government can use as alternative fiscal instruments an income tax, a consumption tax, or the two taxes jointly. These results are at odds with recent literature. We argue that the reason for this divergence is an inappropriate specification of the transactions technology adopted in the literature.
Keywords: Friedman rule; inflation tax; transactions technology
JEL Codes: E31; E41; E58; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| different tax instruments (H25) | optimal taxation of money (H21) |
| mis-specified transactions technology (O33) | optimality of taxing money (H21) |
| specification of transactions technology (O33) | optimality of tax policies (H21) |
| unit elasticity of money with respect to price level (E41) | optimality of the Friedman rule (H21) |
| optimal policy mix (E63) | full taxation of income and subsidization of consumption (H29) |