Working Paper: NBER ID: w1583
Authors: Joshua Aizenman
Abstract: This paper studies the optimal use of distortive policies aimed at raising a given real revenue, in a general equilibrium framework in which lump-sum taxes are absent. The policies analyzed are an inflation tax,commercial policy, and an implicit tax on capital inflows implemented by capital controls. It is shown that we would tend to avoid activating an inflation tax for small revenue needs. Furthermore, if the policy target were allocative, we would tend to use only one policy instrument.Thus, each policy has its own comparative advantage, and their combined use is justified when the target is raising government revenue. As a by-product of the paper,we study the determinants of exchange rates, prices, and quantities in an economy subject to capital controls and commercial policy.
Keywords: commercial policy; capital controls; inflation tax; government revenue; distortive policies
JEL Codes: F41; H21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government revenue needs (H27) | inflation tax (E31) |
| inflation tax (E31) | government revenue generation (H27) |
| government revenue needs (H27) | choice of policy instruments (E60) |
| policy choice (D78) | economic outcomes (F61) |
| magnitude of government revenue needs (H19) | choice of policy instruments (E60) |
| tariffs and capital controls (F38) | government revenue generation (H27) |
| policy effectiveness (D78) | economic context (E66) |
| welfare costs (I30) | structure of government revenue needs (H19) |