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Inflation And Taxation With Optimizing Governments

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  • James M. Poterba
  • Julio J. Rotemberg

Abstract

This paper extends and evaluates previous work on the positive theory of inflation. We examine the behavior of governments concerned solely with minimizing the deadweight loss from raising revenue through inflation and tax finance. We show that both governments that can commit to future policy actions, as well as those that cannot precommit, will choose a positive contemporaneous association between inflation and the level of tax burdens. We examine the empirical validity of this prediction using data from Britain, France, Germany, Japan, and the United States. Inflation and tax rates are as likely to be negatively as positively correlated, so the results cast doubt on the empirical relevance of simple models in which governments with time-invariant tastes choose monetary policy to equate the marginal deadweight burdens of inflation and taxes.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2567.

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Date of creation: Apr 1988
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Publication status: published as Poterba, James M. and Julio J. Rotemberg, "Inflation And Taxation With Optimizing Governments." Journal of Money, Credit, and Banking, Vol. 22, No. 1, pp. 1-18, (February 1990).
Handle: RePEc:nbr:nberwo:2567

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