Optimal Taxation, Inflation and the Formal and Informal Sectors

Saif asif Khan () and Sajawal Khan ()
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Saif asif Khan: PhD Scholar, London School of Economics, Department of Economics.

No 40, SBP Working Paper Series from State Bank of Pakistan, Research Department

Abstract: This paper adds to the literature concerning the relationship between inflation and the degree of informality observed in developing countries. The government's optimal response, vis-á-vis usage of an inflation tax and a consumption tax, to changes in the subsistence levels of labour and consumption faced by the formal and informal sectors of the model economy is studied. Very significantly, the paper finds that having a large informal sector does not always imply a high rate of inflation for the economy; and depending on what factors explain the size of the informal sector, we may get differing results for the optimal rate of inflation.

Keywords: Optimal Taxation; Inflation; Informal Sector (search for similar items in EconPapers)
JEL-codes: E2 E5 H2 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2011-06
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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