The Optimal Mix of Taxes on Money, Consumption and Income
We determine the optimal combination of taxes on money, consumption
and income in transactions technology models where exogenous government
expenditures must be financed with distortionary taxes. We show that the
optimal policy does not tax money, regardless of whether the government
can use as alternative fiscal instruments an income tax, a consumption tax,
or the two taxes jointly. These results are at odds with recent literature. We
argue that the reason for this divergence is an inappropriate specification of
the transactions technology adopted in the literature.