The Inflation Tax is Likely to be Inefficient at any Level
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The Inflation Tax is Likely to be Inefficient at any Level
Banaian, King | McClure, J. Harold | Willett, Thomas D.
Credit and Capital Markets – Kredit und Kapital, Vol. 27 (1994), Iss. 1 : pp. 30–42
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King Banaian, Minnesota
J. Harold McClure, Minnesota
Thomas D. Willett, Minnesota
Cited By
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A FISCAL THEORY OF GOVERNMENT'S ROLE IN MONEY
Selgin, George
White, Lawrence H.
Economic Inquiry, Vol. 37 (1999), Iss. 1 P.154
https://doi.org/10.1111/j.1465-7295.1999.tb01422.x [Citations: 35]
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Abstract
The traditional calculation of the optimal inflation tax yields optimal inflation rates between 30 and 200 percent. This ignores any output costs generated by higher anticipated inflation. We argue that the literature since Friedman’s Nobel lecture supports the hypothesis that higher inflation lowers growth. This Friedman effect lowers both the optimal rate and the rate that maximizes the government’s total revenue from inflation and income taxation. Simple calculations demonstrate that if a 10% anticipated inflation reduces growth by 1% per annum, the optimal rate of inflation in industrialized economies is zero unless the marginal cost of the income tax is very high. The revenue motive, while reduced by the Friedman effect, remains relatively strong.