IDEAS home Printed from https://ideas.repec.org/a/aea/aejmac/v18y2026i4p64-93.html

Optimal Taxation of Inflation

Author

Listed:
  • Damien Capelle
  • Yang Liu

Abstract

This paper analyzes the effectiveness of a tax on inflation policy (TIP), which would require firms to pay a tax proportional to the increase in their prices or wages, in stabilizing inflation. We show that TIP would effectively correct externalities in firms' pricing decisions, tackle excessive inflation and reduce output volatility. While proposals from the 1970s saw TIP as a substitute for MP, we find that they are complementary, with TIP addressing cost-push shocks, and MP addressing demand shocks. In sharp contrast with price controls, TIP doesn't exacerbate relative price distortions.

Suggested Citation

  • Damien Capelle & Yang Liu, 2026. "Optimal Taxation of Inflation," American Economic Journal: Macroeconomics, American Economic Association, vol. 18(4), pages 64-93, October.
    • Handle: RePEc:aea:aejmac:v:18:y:2026:i:4:p:64-93
    DOI: 10.1257/mac.20240248
    as

    Download full text from publisher

    File URL: https://www.aeaweb.org/doi/10.1257/mac.20240248
    Download Restriction: Access to full text is restricted to AEA members and institutional subscribers.
    File URL: https://doi.org/10.3886/E233062V1
    Download Restriction: no
    File URL: https://www.aeaweb.org/articles/materials/26128
    Download Restriction: no
    File URL: https://www.aeaweb.org/articles/materials/26129
    Download Restriction: no
    File URL: https://libkey.io/10.1257/mac.20240248?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E64 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Incomes Policy; Price Policy
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:aea:aejmac:v:18:y:2026:i:4:p:64-93. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Michael P. Albert (email available below). General contact details of provider: https://edirc.repec.org/data/aeaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.