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Tax Distortions in a Neoclassical Monetary Economy in the Presence of Administration Costs

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  • Radhika Lahiri

Abstract

This paper uses the neoclassical growth model to evaluate the size of distortions associated with different monetary and fiscal policies designed to finance government expenditures in the presence of administration costs. The model is calibrated to match important features of U.S. data, and used to evaluate welfare costs of monetary and fiscal policies. We find that the presence of administration costs increases the welfare costs of government policies involving different combinations of taxes on capital and labour income, consumption and money holdings. In addition, the welfare implications of tax reforms designed to replace the taxes on labor or capital income with less distorting forms of taxation are altered. Another implication of the results is that in economies with larger costs of administration, revenue replacement through seigniorage would be a more attractive option than other feasible forms of taxation.

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File URL: http://external-apps.qut.edu.au/business/documents/discussionPapers/2003/DP%20151%20Lahiri.pdf
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Bibliographic Info

Paper provided by School of Economics and Finance, Queensland University of Technology in its series School of Economics and Finance Discussion Papers and Working Papers Series with number 151.

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Date of creation: 20 Sep 2003
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Handle: RePEc:qut:dpaper:151

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  1. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
  2. Cooley, T.F. & Hansen, G.D., 1991. "Tax Distortions in a Neoclassical Monetary Economy," RCER Working Papers 265, University of Rochester - Center for Economic Research (RCER).
  3. Kenny, Lawrence W & Toma, Mark, 1997. " The Role of Tax Bases and Collections Costs in the Determination of Income Tax Rates, Seigniorage and Inflation," Public Choice, Springer, vol. 92(1-2), pages 75-90, July.
  4. Click, Reid W., 2000. "Seigniorage and conventional taxation with multiple exogenous shocks," Journal of Economic Dynamics and Control, Elsevier, vol. 24(10), pages 1447-1479, September.
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