Staff Report 193

The Jointly Optimal Inflation Tax, Income Tax Structure, and Transfers

Preston J. Miller | Former Vice President and Monetary Adviser

Revised January 1, 1999

The welfare-maximizing income tax structure, rate of money creation, and amounts of intergenerational transfers are jointly determined for given rates of government consumption. When government consumption is zero, it is found for the parameter values examined that the income tax structure is progressive, the rate of money change is negative, and positive transfers are made to the old. As government consumption increases, the tax structure’s progressivity declines and turns increasingly regressive, the rate of money change rises, and transfers decrease. It is found that the bulk of the increase in government consumption is optimally financed by a cut in transfers.

Published In: Economic and Financial Modelling (Vol. 5, No. 4, Winter 1998, pp. 153-184)

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