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- Title
A QUANTITATIVE ANALYSIS OF TAX ENFORCEMENT AND OPTIMAL MONETARY POLICY.
- Authors
Arbex, Marcelo
- Abstract
This paper explores the consequences of tax enforcement policies for monetary policy. Agents may evade taxes by working in the informal sector, but they are detected with positive probability. Workers are rewarded with government benefits that are proportional to formal (taxed) work. When enforcement is imperfect and collecting taxes is costly, the optimal inflation rate is positive and inflation becomes a second-best tax. Deviations from the Friedman rule are optimal and depend on the tax enforcement policies. Using U.S. data, we compute the quantitative effect of different tax structures on inflation and interest rate. We show that different tax enforcement and government spending (benefits) policies induce different optimal outcomes for inflation and interest rates.
- Subjects
QUANTITATIVE research; TAX enforcement; MONETARY policy; INFORMAL sector; PROBABILITY theory; DATA analysis; TAX evasion
- Publication
Macroeconomic Dynamics, 2013, Vol 17, Issue 5, p1096
- ISSN
1365-1005
- Publication type
Article
- DOI
10.1017/S1365100512000089