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The optimal inflation tax when taxes are costly to collect

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Author Info
Fiorella de Fiore () (European Central Bank, Kaiserstrasse 29, Postfach 16 03 19, 60066 Frankfurt am Main, Germany.)

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Abstract

Tax collection costs have been advocated in the literature as a reason to deviate from the Friedman rule, in standard general equilibrium monetary models with flexible prices. This paper shows that there are conditions under which the Friedman rule is optimal despite the presence of collection costs. When these conditions are not satisfied, the optimal inflation tax depends upon the collection costs parameter and schedule, the interest and scale elasticity of money demand, and the compensated labor supply elasticity. Numerical results obtained by calibrating the model on US data suggest that collection costs do not justify substantial departures from Friedman's prescriptions. JEL Classification: E31; E41; E58; E62.

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Paper provided by European Central Bank in its series Working Paper Series with number 38.

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Length: 42 pages
Date of creation: Nov 2000
Date of revision:
Handle: RePEc:ecb:ecbwps:20000038

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Related research
Keywords: Friedman rule; optimal inflation tax; collection costs.;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Mark A. Wynne, 1999. "Core inflation: a review of some conceptual issues," Working Paper Series 5, European Central Bank. [Downloadable!]
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  2. Correia, Maria Isabel Horta & Teles, Pedro, 1996. "Is the Friedman Rule Optimal When Money is an Intermediate Good?," CEPR Discussion Papers 1287, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  3. Günter Coenen, 2000. "Asymptotic confidence bands for the estimated autocovariance and autocorrelation functions of vector autoregressive models," Working Paper Series 09, European Central Bank. [Downloadable!]
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  4. Faig, Miquel, 1988. "Characterization of the optimal tax on money when it functions as a medium of exchange," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 137-148, July. [Downloadable!] (restricted)
  5. Orphanides, Athanasios & Wieland, Volker, 2000. "Inflation zone targeting," European Economic Review, Elsevier, vol. 44(7), pages 1351-1387, June. [Downloadable!] (restricted)
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  6. Ignazio Angeloni & Luca Dedola, 1999. "From the ERM to the euro: new evidence on economic and policy convergence among EU countries," Working Paper Series 4, European Central Bank. [Downloadable!]
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  7. Carlo Monticelli & Oreste Tristani, 1999. "What does the single monetary policy do? A SVAR benchmark for the European Central Bank," Working Paper Series 2, European Central Bank. [Downloadable!]
  8. Joel Slemrod, 1985. "The Return to Tax Simplification: An Econometric Analysis," NBER Working Papers 1756, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Reint Gropp & Kristina Kostial, 2000. "The disappearing tax base: is foreign direct investment eroding corporate income taxes?," Working Paper Series 31, European Central Bank. [Downloadable!]
  11. Pencavel, John, 1987. "Labor supply of men: A survey," Handbook of Labor Economics, in: O. Ashenfelter & R. Layard (ed.), Handbook of Labor Economics, edition 1, volume 1, chapter 1, pages 3-102 Elsevier. [Downloadable!] (restricted)
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  13. Chari, V. V. & Christiano, Lawrence J. & Kehoe, Patrick J., 1996. "Optimality of the Friedman rule in economies with distorting taxes," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 203-223, April. [Downloadable!] (restricted)
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  14. Killingsworth, Mark R. & Heckman, James J., 1987. "Female labor supply: A survey," Handbook of Labor Economics, in: O. Ashenfelter & R. Layard (ed.), Handbook of Labor Economics, edition 1, volume 1, chapter 2, pages 103-204 Elsevier. [Downloadable!] (restricted)
  15. Vegh, Carlos A., 1989. "The optimal inflation tax in the presence of currency substitution," Journal of Monetary Economics, Elsevier, vol. 24(1), pages 139-146, July. [Downloadable!] (restricted)
  16. Nicolini, Juan Pablo, 1998. "Tax evasion and the optimal inflation tax," Journal of Development Economics, Elsevier, vol. 55(1), pages 215-232, February. [Downloadable!] (restricted)
  17. Carsten Detken, 1999. "Fiscal policy effectiveness and neutrality results in a non-Ricardian world," Working Paper Series 3, European Central Bank. [Downloadable!]
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  20. Isabel Correia & Pedro Teles, 1999. "The Optimal Inflation Tax," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(2), pages 325-346, April. [Downloadable!] (restricted)
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  21. Stuart, Charles E, 1984. "Welfare Costs per Dollar of Additional Tax Revenue in the United States," American Economic Review, American Economic Association, vol. 74(3), pages 352-62, June. [Downloadable!] (restricted)
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  23. Casey B. Mulligan & Xavier X. Sala-i-Martin, 1997. "The Optimum Quantity of Money: Theory and Evidence," NBER Working Papers 5954, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  24. Günter Coenen & Juan-Luis Vega, 1999. "The demand for M3 in the euro area," Working Paper Series 6, European Central Bank. [Downloadable!]
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  25. Kimbrough, Kent P., 1986. "The optimum quantity of money rule in the theory of public finance," Journal of Monetary Economics, Elsevier, vol. 18(3), pages 277-284, November. [Downloadable!] (restricted)
  26. Olivier de Bandt & E Philip Davis, 1999. "A cross-country comparison of market structures in European banking," Working Paper Series 7, European Central Bank. [Downloadable!]
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Diego Rodriguez Palenzuela & Gonzalo Camba-Mendez & Juan Angel Garcia, 2003. "Relevant economic issues concerning the optimal rate of inflation," Working Paper Series 278, European Central Bank. [Downloadable!]
  2. Pierre-Richard Agénor & Kyriakos C. Neanidis, 2007. "Optimal Taxation and Growth with Public Goods and Costly Enforcement," Centre for Growth and Business Cycle Research Discussion Paper Series 89, Economics, The Univeristy of Manchester. [Downloadable!]
  3. Jean-Bernard Chatelain & Andrea Generale & Ignacio Hernando & Philip Vermeulen & Ulf von Kalckreuth, 2001. "Firm investment and monetary policy transmission in the Euro area," Working Paper Series 112, European Central Bank. [Downloadable!]
    Other versions:
  4. Gonzalo Camba-Mendez & George Kapetanios, 2001. "Spectral based methods to identify common trends and common cycles," Working Paper Series 062, European Central Bank. [Downloadable!]
  5. Fiorella de Fiore, 2000. "Can indeterminacy explain the short-run non-neutrality of money?," Working Paper Series 32, European Central Bank. [Downloadable!]
  6. Matt Klaeffling & Victor Lopez Perez, 2003. "Inflation targets and the liquidity trap," Working Paper Series 272, European Central Bank. [Downloadable!]
  7. Pinar Yesin, 2004. "Tax Collection Costs, Tax Evasion and Optimal Interest Rates," Working Papers 04.02, Swiss National Bank, Study Center Gerzensee. [Downloadable!]
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