Optimal taxation in a monetary economy with financial intrmediaries

The problem of optimal taxation when the government must levy distorting taxes to meet its revenue needs is considered for a monetary economy with financial intermediaries. In contrast to most other studies of optimal taxation in a monetary economy, money is treated as an intermediate good which is held because doing so economizes on the scarce resources that must be devoted to the exchange process. Attention is focused on the roles of the inflation tax, reserve requirements, and deposit taxes. The key result is that revenue considerations do not justify taxing cash and deposits. That is, the optimal tax structure calls for adopting the optimum quantity of money rule and setting deposit taxes to zero. When the optimal tax structure is in place, reserve requirements turn out to be irrelevant from both the fiscal and welfare perspectives. © 1989.

Duke Scholars

Author Kent P. Kimbrough Economics