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Optimum Inflation, Taxation and Monetary Arrangements in the Open Economy

In: International Trade and Labour Markets

Author

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  • Peter Sinclair

Abstract

Any government’s expenditure needs should ideally be met from lumpsum taxes. Taxes on labour earnings distort labour supply. They contravene the Pareto-efficiency principle requiring equally between the marginal product of labour and the marginal rate of substitution between leisure and consumption. Equiproportionate sales taxes on different consumption goods have just the same effect. We know, too, that taxing money balances is distortionary. In a first-best, money should be left untaxed. That requires a monetary policy that engineers a long-run rate of decline in nominal prices equal to the real rate of interest.1

Suggested Citation

  • Peter Sinclair, 1997. "Optimum Inflation, Taxation and Monetary Arrangements in the Open Economy," Palgrave Macmillan Books, in: Jitendralal Borkakoti & Chris Milner (ed.), International Trade and Labour Markets, chapter 9, pages 203-218, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-349-14577-5_9
    DOI: 10.1007/978-1-349-14577-5_9
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