Tax evasion and the optimal inflation tax
نویسنده
چکیده
We developed a simple monetary model to study the effects of tax evasion on the optimal inflation tax. The model is constructed so that inflation might be an indirect way of taxing the underground sector of the economy. We show that while there are theoretical reasons for positive optimal inflation rates, the effects are quantitatively small, even in countries with large underground sectors. We calculate the optimal nominal interest rate for Peru to be between 7% and 19%, despite the fact that its underground sector is close to 40% of measured GNP. According to our calculations, the welfare gain of using inflation to tax the underground sector is also very small. q 1998 Elsevier Science B.V. JEL classification: E31; E52; H26
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