“Theory and Policy: A Comment on Dixit and on Current Tax Theory”

The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.

Abstract

The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.

In a recent paper, Professor Dixit criticized the argument that when collection lags characterize tax systems, recourse to inflationary finance should be minimized. He argued that, in such a case, rather than minimizing recourse to inflationary finance, the rates of the commodity taxes should be adjusted to maintain them at an optimal level so as to minimize welfare costs. This paper shows that the requirements for following Dixit’s policy prescription are almost impossible to meet. The paper argues that tax theorists should pay more attention to the constraints under which tax reforms are made.

Working Paper Summaries (WP/92/1 - WP/92/47)
Author: International Monetary Fund