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The observation that inflation reduces real revenues when there are lags in tax collection has long been a strong argument against seigniorage. However, with the exception of Dixit, who used a general equilibrium model to reject this argument, the optimal taxation literature has not analyzed how collection lags affect desired tax structures. This paper reexamines the issue using an overlapping generations version of Dixit’s model. It is shown that depending on the size of the expenditure ratio and the specification of the collection cost function, lags may increase, leave unchanged, or reduce the desired rate of inflation.

Charles Y. Mansfield

IN CONSIDERING CRITERIA for a tax system in a developing country the response of tax revenue to changes in income has often been singled out as a vital ingredient.1 This response is measured by the concepts of tax elasticity and tax buoyancy, the former measuring in some sense the automatic response of revenue to income changes (i.e., revenue increase, excluding the effects of discretionary changes), and the latter measuring the total response of tax revenue to changes in income. A high tax elasticity is said to be a particularly desirable attribute, as it allows growth in expenditure, preferably related to development, to be financed by rising tax revenue without the need for politically difficult decisions to raise taxes. However, in fact, major sources of government revenue may have a low elasticity, in which case the authorities must seek additional revenue by introducing discretionary changes. Then, growth in tax revenue may come about through a high buoyancy 2—including growth through discretionary changes—as opposed to the natural growth through elasticity. Using Paraguay as an example, this paper analyzes the growth of tax revenues over the 1962-70 period—an era of conscious tax reform—by examining two major questions: (1) what was the elasticity of the system and its components, and how is the size of the elasticity coefficient explained? and (2) what was the buoyancy of the system relative to its elasticity? With respect to individual taxes, where were the major differences between buoyancy and elasticity found? These latter questions point to the effect of discretionary changes.

International Monetary Fund. Research Dept.
This paper focuses on various aspects of the Euro-dollar market. The market in Euro-dollars is a wide and complicated one spread over six continents and bound together by a network of cable, telex, and telephone communication. The paperwork in the market tends to confirm rather than to initiate transactions. The financial standing of the banks in the market is such that transactions are based on names and do not involve collateral and guarantees. Some Euro-dollar funds are used to finance commercial loans and other domestic transactions, either in the form of dollars or in local currency purchased with dollars. There has been a large amount of such transactions in Germany, Italy, and Japan, and smaller amounts in many other countries, including Switzerland. The role of Euro-dollars as a money market instrument has some important implications. A substantial part of the Euro-dollar pool circulates and recirculates endlessly among banks. The rapid development of the Euro-dollar market, the facilities offered by a new money market instrument, and the increased, although gentlemanly, competition among banks on both the domestic and international scene, have been accompanied by a certain amount of exuberance.

The literature dealing with the impact of inflation on taxation is so extensive that it may suggest that it would be difficult to write anything novel on this subject. Yet a close perusal of this literature shows that it has been biased by the recent experiences of the industrialized countries. For these countries, inflation has generally been associated with increases in the real value of tax revenues, so that many authors have been led to believe that the main inflation-induced problems are the prevention of this supposedly unwanted, or at least unlegislated, increase in revenue and the neutralization of the inevitable effects on the redistribution of the tax burden among income groups. The increase in real revenue is likely to occur mainly when (a) the lags in the collection of taxes are short, and (b) the tax systems are elastic. However, while these conditions seem to characterize many industrialized countries, they are not common to all countries.

Mr. Vito Tanzi and Mr. Parthasarathi Shome

Tax evasion is universal. It depends on the economic and tax structures, types of income, and social attitudes. The theory of tax evasion has limitations since it rests solely on attitudes toward risk, with full information regarding the tax administration’s behavior. Methodologies for estimating tax evasion include estimating the underground economy and comparing declared taxes with potential tax revenue calculated from national accounts. Measures to address tax evasion include use of withholding, presumptive and minimum taxes, selective auditing, penalties, and cross checks between taxes.

Joyce Sherwood

THE USUAL PURPOSE of multiple exchange rates is to cope with over-all balance of payments problems. Sometimes, e.g., when multiple rates are designed to deal with problems of particular exports or the relative holdings of various currencies, they may have a direct effect on these problems. But when they are designed to reduce or to counteract internal inflationary pressure, they may have an indirect effect. If multiple rates are to produce such an anti-inflationary effect, they must yield revenue or exchange profits. Frequently, indeed, the raising of revenue is a specific secondary purpose of a multiple rate practice; but in any case, irrespective of the purpose, the result often is an increase of revenue.


The sensitivity (i.e., elasticity and built-in flexibility) of the U. S. individual income tax to changes in national income is of great interest to researchers and policymakers. However, the direct measurement of this sensitivity—that is, the measurement obtained from time-series observations of the relevant variables—has always been difficult, and even at times impossible, because changes in the legal structure of the tax have been too frequent to provide enough observations that relate to the same legal structure to allow statistically significant coefficients to be determined. This was particularly true in the United States before 1954, when the rates were changed frequently; it has also been true since 1963, when important changes occurred in rates, personal exemptions, deductions, and other features. In contrast, during the period between 1954 and 1963, hardly any significant statutory changes occurred in the tax.

Jørgen R. Lotz

THE ECONOMIC SYSTEM of the United Arab Republic has been changed in the past 12 years from a predominantly free enterprise system to a largely publicly owned and regulated economy. An impressive rate of growth has been attained; since 1956/57, the gross national product (GNP) is estimated to have grown at an average annual rate of more than 5 per cent and per capita income by more than 2.5 per cent a year.

Juanita D. Amatong

ECONOMISTS GENERALLY AGREE that gains from capital are a proper source of taxation in developing countries. This view was expressed in the Technical Assistance Conference on Comparative Fiscal Administration in Geneva in 1951 and more recently in the Santiago Conference on Fiscal Policy for Economic Growth in Latin America.1 A capital gains tax is on the appreciation of capital assets and is commonly imposed only when the increase in value is realized through sale or exchange. It should be distinguished from net wealth tax, death duties, and other capital taxes in that these are assessed on the total value of assets.

George E. Lent

ECONOMIC DEVELOPMENT is frequently accompanied by the growth of population and its increased concentration in urban areas, which imposes greater demands on the government for the provision of essential services, sometimes at a considerable cost. A real problem arises in financing this cost and equitably apportioning it among the members of the community. Because population growth and higher standards of living inevitably enhance the value of land, many governments have sought ways of allocating this cost among the landowners who benefit directly and indirectly from rising land values.