The Friedman rule in an overlapping-generations model with nonlinear taxation and income misreporting

Firouz Gahvari and Luca Micheletto

Journal of Public Economics, 2014, vol. 119, issue C, 10-23

Abstract: This paper models a two-period overlapping-generations economy with money populated with individuals of different skills. They face a nonlinear income tax schedule and can engage in tax evasion. Money serves two purposes: the traditional one, modeled through a money-in-the-utility-function; it also facilitates tax evasion. The main message of the paper is that income tax evasion in this framework leads to the violation of the Friedman rule. The paper also shows that even in the absence of tax evasion, when optimality requires differential commodity taxation, complementarity of real cash balances and labor supply does not guarantee the optimality of the Friedman rule as a boundary solution. An additional assumption is required.

Keywords: The Friedman rule; Tax evasion; Overlapping-generations; Second best; Monetary policy; Fiscal policy; Redistribution (search for similar items in EconPapers)
JEL-codes: E52 H21 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:pubeco:v:119:y:2014:i:c:p:10-23

DOI: 10.1016/j.jpubeco.2014.06.015

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