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- Title
INFLATION, UNEMPLOYMENT AND INDIRECT TAXATION.
- Authors
Henry, S. G. B.; Karakitsos, E.
- Abstract
This paper examines whether indirect taxes are desirable from the point of view of inflation and unemployment in Great Britain. A cut in the average indirect tax reduces market prices and, assuming a wage cost spiral, temporarily lowers inflation, while increasing real disposable income, hence demand and consequently employment. Thus, a natural question is whether indirect taxation should be continuously lowered if inflation and unemployment are considered as the most important objectives of a government's economic policy. It should be immediately admitted that other reasons might still necessitate the existence of indirect taxes, but presumably that the desirability of indirect taxation from the point of view of inflation and unemployment is in itself an important issue. In the next section a small analytical model is built in which the transmission mechanism of the average rate of indirect tax in the short and the long run is analysed. The model includes two distinguishing features of the National Institute model of Great Britain, which is used to study the effects of an indirect tax cut empirically. These are the effect on output of the inflation loss of holding liquid assets; and real wage rigidity.
- Subjects
UNITED Kingdom; INDIRECT taxation; PRICE inflation &; taxation; PRICE inflation; EXCISE tax; UNEMPLOYMENT; INTERNAL revenue
- Publication
Bulletin of Economic Research, 1987, Vol 39, Issue 1, p29
- ISSN
0307-3378
- Publication type
Article
- DOI
10.1111/j.1467-8586.1987.tb00230.x