Optimal Taxes Under Private Information: The Role of the Inflation

Pedro Gomis-Porqueras and Christopher Waller

No 2017-014, Working Papers from Federal Reserve Bank of St. Louis

Abstract: We consider an overlapping generation framework with search and private information to study optimal taxation. Agents sequentially trade in markets that are characterized by different frictions and trading protocols. In frictional decentralized markets, agents receive shocks that determine if they are going to be consumers or producers. Shocks are private information. Mechanism design is used to solve for the constrained optimal allocation. We then study whether a government can replicate the constrained optimal allocation with an array of policy instruments including fiat money. We show that if the government has a full set of non-linear taxes, then lump-sum taxes and inflation are irrelevant for the allocation. However, if the government is constrained to use linear taxes, then using the inflation tax is optimal even if lump-sum taxes are available.

Keywords: Fiat Money; Taxation; Private Information (search for similar items in EconPapers)
JEL-codes: E40 H21 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2017-05-31, Revised 2020-08-20
New Economics Papers: this item is included in nep-des, nep-dge, nep-mac, nep-pbe and nep-pub
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Citations: View citations in EconPapers (2)

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Journal Article: Optimal Taxes under Private Information: The Role of Inflation (2022)
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DOI: 10.20955/wp.2017.014

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