An Estimation of Impact of Financial Repression on Budget Revenues

Оценка воздействия финансовой репрессии на доходы бюджета

Isakov, Kanat S. (Исаков, Канат) () and Sergey Pekarski

Ekonomicheskaya Politika / Economic Policy, 2016, vol. 5, 28-49

Abstract: Modern financial repression in developed countries takes the form of various measures aimed at increasing the placement of public debt with a below-market or even negative real rate of return. It provides governments with an additional revenue or liquidates their debt. But financial repression is a hidden tax on wealth, which introduce additional distortions into the economy and thus affects the base of traditional taxes. In this paper we introduce financial repression into the neoclassical dynamic general equilibrium model to assess its overall impact on government revenues. Following the framework of Trabandt and Uhlig (2011) we estimate Laffer curves for USA and the set of European countries. We show, that tighter repression shifts Laffer curves for consumption and labor-income taxes down, but actually increases the revenue from capital-income taxation. As a result, and despite a decrease in output, financial repression leads to an increase in government purchases. We also estimate marginal rates of substitutions between different policy instruments and show, that while the U.S. economy cannot loosen repression without forgoing government purchases or increasing traditional taxes, European economies are on the wrong side of the Laffer hill for financial repression that allows decreasing public debt and increasing its rate of return.

Keywords: financial repression; public debt; distortionary taxation; Laffer curves (search for similar items in EconPapers)
JEL-codes: E62 G28 H21 H24 H31 H63 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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