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The optimal mix of taxes on money, consumption and income

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  • Fiorella De Fiore
  • Pedro Teles

Abstract

We determine the optimal combination of taxes on money, consumption and income in transactions technology models where exogenous government expenditures must be financed with distortionary taxes. We show that the optimal policy does not tax money, regardless of whether the government can use as alternative fiscal instruments an income tax, a consumption tax, or the two taxes jointly. These results are at odds with recent literature. We argue that the reason for this divergence is an inappropriate specification of the transactions technology adopted in the literature.

Suggested Citation

  • Fiorella De Fiore & Pedro Teles, 2002. "The optimal mix of taxes on money, consumption and income," Working Paper Series WP-02-03, Federal Reserve Bank of Chicago.
  • Handle: RePEc:fip:fedhwp:wp-02-03
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    References listed on IDEAS

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    Cited by:

    1. Isabel Correia & Juan Pablo Nicolini & Pedro Teles, 2008. "Optimal Fiscal and Monetary Policy: Equivalence Results," Journal of Political Economy, University of Chicago Press, vol. 116(1), pages 141-170, February.
    2. Lippi, Francesco & Secchi, Alessandro, 2006. "Technological change and the demand for currency: An analysis with household data," CEPR Discussion Papers 6023, C.E.P.R. Discussion Papers.
    3. Alexandre Cunha, 2004. "The Friedman Rule in a Two Sector Small Open Economy," Econometric Society 2004 North American Summer Meetings 530, Econometric Society.
    4. De Fiore, Fiorella & Teles, Pedro, 2003. "The optimal mix of taxes on money, consumption and income," Journal of Monetary Economics, Elsevier, pages 871-887.
    5. Miguel Casares, 2007. "The New Keynesian Model and the Euro Area Business Cycle," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 69(2), pages 209-244, April.
    6. Alexandre Cunha, 2008. "The optimality of the Friedman rule when some distorting taxes are exogenous," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), pages 267-291.
    7. Alexander M. Gelber, 2014. "Taxation and the Earnings of Husbands and Wives: Evidence from Sweden," The Review of Economics and Statistics, MIT Press, pages 287-305.
    8. Gahvari, Firouz & Micheletto, Luca, 2012. "Monetary policy and redistribution: What can or cannot be neutralized with Mirrleesian taxes," Working Paper Series, Center for Fiscal Studies 2012:5, Uppsala University, Department of Economics.
    9. Arbex, Marcelo & Turdaliev, Nurlan, 2011. "Optimal monetary and audit policy with imperfect taxation," Journal of Macroeconomics, Elsevier, pages 327-340.
    10. Klaeffling, Matt & López Pérez, Víctor, 2003. "Inflation targets and the liquidity trap," Working Paper Series 272, European Central Bank.
    11. De Fiore, Fiorella, 2000. "Can indeterminacy explain the short-run non-neutrality of money?," Working Paper Series 0032, European Central Bank.
    12. Wen-ya Chang & Hsueh-fang Tsai & Juin-jen Chang & Kuo-Hao Lee, 2015. "Consumption tax, seigniorage tax and tax switch in a cash-in-advance economy of endogenous growth," Journal of Economics, Springer, pages 23-42.
    13. De Fiore, Fiorella, 2000. "The optimal inflation tax when taxes are costly to collect," Working Paper Series 0038, European Central Bank.
    14. Lippi, Francesco & Secchi, Alessandro, 2009. "Technological change and the households' demand for currency," Journal of Monetary Economics, Elsevier, pages 222-230.
    15. Lippi, Francesco & Secchi, Alessandro, 2009. "Technological change and the households' demand for currency," Journal of Monetary Economics, Elsevier, pages 222-230.
    16. Angelo Marsiglia Fasolo, 2014. "The Ramsey Steady State under Optimal Monetary and Fiscal Policy for Small Open Economies," Working Papers Series 357, Central Bank of Brazil, Research Department.

    More about this item

    Keywords

    Consumption (Economics) ; Income ; Taxation;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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