DP3437 The Optimal Mix of Taxes on Money, Consumption and Income

Author(s): Fiorella De Fiore, Pedro Teles
Publication Date: June 2002
Keyword(s): friedman rule, inflation tax, transactions technology
JEL(s): E31, e41, E58, E62
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3437

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.