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Costly Tax Enforcement and Financial Repression

Rangan Gupta () and Emmanuel Ziramba

No 200818, Working Papers from University of Pretoria, Department of Economics

Abstract: Using a simple pure-exchange overlapping generations model characterized by financial repression, purposeful government expenditures and cost of tax collection, we analyze whether financial repression can be explained by the cost of raising taxes. We show that with public expenditures affecting utility of the agents, modest costs of tax collection tend to result in financial repression being pursued as an optimal policy by the consolidated government. However, when public expenditures are purposeless, the above result only holds for relatively higher costs of tax collection. But, more importantly, costs of tax collection cannot produce a monotonic increase in the reserve requirements, what are critical, in this regard, are the weights the consumer assigns to the public good in the utility function and the size of the government.

Keywords: Pure Exchange Overlapping Generations Model; Costly Tax Enforcement; Financial Repression (search for similar items in EconPapers)
JEL-codes: E62 H21 O41 (search for similar items in EconPapers)
Pages: 15 pages
Date: 2008-06
New Economics Papers: this item is included in nep-dge and nep-mac
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