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Costly Tax Enforcement and Financial Repression

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  • Rangan Gupta

    ()
    (Department of Economics, University of Pretoria)

  • Emmanuel Ziramba

    ()
    (Department of Economics, University of South Africa)

Abstract

Using a simple pure-exchange overlapping generations model characterized by financial repression, purposeful government expenditures and cost of tax collection, we analyze whether financial repression can be explained by the cost of raising taxes. We show that with public expenditures affecting utility of the agents, modest costs of tax collection tend to result in financial repression being pursued as an optimal policy by the consolidated government. However, when public expenditures are purposeless, the above result only holds for relatively higher costs of tax collection. But, more importantly, costs of tax collection cannot produce a monotonic increase in the reserve requirements, what are critical, in this regard, are the weights the consumer assigns to the public good in the utility function and the size of the government.

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Bibliographic Info

Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 200818.

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Length: 15 pages
Date of creation: Jun 2008
Date of revision:
Handle: RePEc:pre:wpaper:200818

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Keywords: Pure Exchange Overlapping Generations Model; Costly Tax Enforcement; Financial Repression;

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Cited by:
  1. Rangan Gupta & Cobus Vermeulen, 2010. "Private and Public Health Expenditures in an Endogenous Growth Model with Inflation Targeting," Working Papers, University of Pretoria, Department of Economics 201001, University of Pretoria, Department of Economics.

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