Costly Tax Enforcement and Financial Repression

14 Pages Posted: 2 Dec 2008

See all articles by Rangan Gupta

Rangan Gupta

University of Pretoria - Department of Economics

Emmanuel Ziramba

affiliation not provided to SSRN

Abstract

Using an overlapping generations production-economy model characterized by financial repression, purposeful government expenditures and cost of tax collection, we analyse 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.

Suggested Citation

Gupta, Rangan and Ziramba, Emmanuel, Costly Tax Enforcement and Financial Repression. Economic Notes, Vol. 37, Issue 2, pp. 141-154, July 2008, Available at SSRN: https://ssrn.com/abstract=1307303 or http://dx.doi.org/10.1111/j.1468-0300.2008.00194.x

Rangan Gupta (Contact Author)

University of Pretoria - Department of Economics ( email )

Lynnwood Road
Hillcrest
Pretoria, 0002
South Africa

Emmanuel Ziramba

affiliation not provided to SSRN

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