Central Bank Digital Currency, Tax Evasion, Inflation Tax, and Central Bank Independence

59 Pages Posted: 7 Dec 2020

See all articles by Ohik Kwon

Ohik Kwon

Bank of Korea - Economic Research Institute

Seungduck Lee

Sungkyunkwan University

Jaevin Park

Soongsil University

Date Written: December 4, 2020

Abstract

Can introducing Central Bank Digital Currency (CBDC) improve social welfare? We construct a dual currency model to study whether introducing CBDC with a recordkeeping technology can reduce tax evasion incentives in cash transactions, and further achieve a better allocation than in a cash-only economy. Tax evasion does not occur in an economy only with an inflation tax. However, if imposing a positive sales tax is inevitable for central bank independence, there arises an inefficiency associated with tax evasion in cash transactions. Introducing CBDC with positive interest can reduce this inefficiency and thus improve welfare by discouraging tax evasion, and rewarding tax payments.

Keywords: Cash, Central Bank Digital Currency, Monetary Policy, Inflation Tax, Tax Evasion

JEL Classification: E31, E42, E58, H21, H26

Suggested Citation

Kwon, Ohik and Lee, Seungduck and Park, Jaevin, Central Bank Digital Currency, Tax Evasion, Inflation Tax, and Central Bank Independence (December 4, 2020). Bank of Korea WP 2020-26, Available at SSRN: https://ssrn.com/abstract=3741816 or http://dx.doi.org/10.2139/ssrn.3741816

Ohik Kwon (Contact Author)

Bank of Korea - Economic Research Institute ( email )

110, 3-Ga, Namdaemunno, Jung-Gu
Seoul 100-794
Korea, Republic of (South Korea)

Seungduck Lee

Sungkyunkwan University ( email )

110-745 Seoul
Korea

Jaevin Park

Soongsil University ( email )

511, Sangdo-dong, Dongjak-gu
Seoul
Korea, Republic of (South Korea)

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