Tax Collection Costs, Tax Evasion and Optimal Interest Rates
In this paper, I investigate to what extent the cross-country variation in nominal interest rates can be explained as being due to governments' optimal response to economic conditions such as tax collection costs, tax evasion and government consumption needs. In particular, I study the effects of costly income taxes in the presence of an informal sector on the solution to a Ramsey problem in a general equilibrium framework. Unlike most of the previous analyses of optimal inflationary finance, the model postulates that conventional taxes carry collection costs whereas fiat money can be printed costlessly. For some countries, I measure tax collection costs, use the tax evasion estimates reported in the literature, and then calculate the optimal interest rate based on the model. Comparison of the actual and optimal interest rates demonstrates that the model can in fact partly explain the observed deviations from the Friedman Rule. I also show that allowing cross-country differences in the elasticity of substitution between formal and informal sectors can increase the model's explanatory power.
|Date of creation:||May 2004|
|Date of revision:|
|Contact details of provider:|| Postal: Studienzentrum Gerzensee, Postfach 21, 3115 Gerzensee|
Phone: ++41 (0)31 780 31 31
Fax: ++41 (0)31 780 31 00
Web page: http://www.szgerzensee.ch/
|Order Information:|| Postal: Studienzentrum Gerzensee, Postfach 21, 3115 Gerzensee|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- de V. Cavalcanti, Tiago V. & Villamil, Anne P., 2003. "Optimal Inflation Tax And Structural Reform," Macroeconomic Dynamics, Cambridge University Press, vol. 7(03), pages 333-362, June.
- Lemieux, Thomas & Fortin, Bernard & Frechette, Pierre, 1994. "The Effect of Taxes on Labor Supply in the Underground Economy," American Economic Review, American Economic Association, vol. 84(1), pages 231-54, March.
- Cukierman, Alex & Edwards, Sebastian & Tabellini, Guido, 1992.
"Seigniorage and Political Instability,"
American Economic Review,
American Economic Association, vol. 82(3), pages 537-55, June.
- Dominik H. Enste & Friedrich Schneider, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March.
- Chari, V.V. & Kehoe, Patrick J., 1999.
"Optimal fiscal and monetary policy,"
Handbook of Macroeconomics,
in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 26, pages 1671-1745
- Nicolini, Juan Pablo, 1998. "Tax evasion and the optimal inflation tax," Journal of Development Economics, Elsevier, vol. 55(1), pages 215-232, February.
- Johnson, Simon & Kaufmann, Daniel & Zoido-Lobaton, Pablo, 1998. "Regulatory Discretion and the Unofficial Economy," American Economic Review, American Economic Association, vol. 88(2), pages 387-92, May.
- Lucas, Robert Jr. & Stokey, Nancy L., 1983.
"Optimal fiscal and monetary policy in an economy without capital,"
Journal of Monetary Economics,
Elsevier, vol. 12(1), pages 55-93.
- Robert E. Lucas Jr. & Nancy L. Stokey, 1982. "Optimal Fiscal and Monetary Policy in an Economy Without Capital," Discussion Papers 532, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Schneider, Friedrich, 2002. "The Size and Development of the Shadow Economies of 22 Transition and 21 OECD Countries," IZA Discussion Papers 514, Institute for the Study of Labor (IZA).
- De Fiore, Fiorella, 2000. "The optimal inflation tax when taxes are costly to collect," Working Paper Series 0038, European Central Bank.
- Isabel Correia & Pedro Teles, 1999.
"The Optimal Inflation Tax,"
Review of Economic Dynamics,
Elsevier for the Society for Economic Dynamics, vol. 2(2), pages 325-346, April.
- Isabel Correia & Pedro Teles, 1997. "The optimal inflation tax," Discussion Paper / Institute for Empirical Macroeconomics 123, Federal Reserve Bank of Minneapolis.
- repec:cup:macdyn:v:7:y:2003:i:3:p:333-62 is not listed on IDEAS
- Fethi Ogunc & Gokhan Yilmaz, 2000. "Estimating The Underground Economy In Turkey," Discussion Papers 0004, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
- Click, Reid W, 1998. "Seigniorage in a Cross-Section of Countries," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(2), pages 154-71, May.
- Carlos A. VÃ©gh, 1989. "Government Spending and Inflationary Finance: A Public Finance Approach," IMF Staff Papers, Palgrave Macmillan, vol. 36(3), pages 657-677, September.
When requesting a correction, please mention this item's handle: RePEc:szg:worpap:0402. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (library)
If references are entirely missing, you can add them using this form.