Costly Tax Enforcement and Financial Repression |
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Authors: | Rangan Gupta Emmanuel Ziramba |
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Affiliation: | 1. Associate Professor, University of Pretoria, Department of Economics, Pretoria, 0002, South Africa. Tel: +27 12 420 3460. Fax: +27 12 362 5207. Email: Rangan.Gupta@up.ac.za.;2. Senior Lecturer, University of South Africa, Department of Economics, P.O. Box 392, Pretoria, 0003, South Africa. Tel: +27 12 429 4486. Email: zirame@unisa.ac.za. |
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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. |
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Keywords: | E62 H21 O41 |
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