Scandinavian Working Papers in Economics

Working Paper Series, Center for Fiscal Studies,
Uppsala University, Department of Economics

No 2012:9: The Friedman rule in an overlapping-generations model with nonlinear taxation and income misreporting

Firouz Gahvari () and Luca Micheletto ()
Additional contact information
Firouz Gahvari: Department of Economics, Postal: University of Illinois at Urbana-Champaign, USA
Luca Micheletto: Uppsala Center for Fiscal Studies, Postal: Department of Economics, Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden

Abstract: This paper models an overlapping-generations economy that includes money and is populated with individuals of different skills. They face a nonlinear income tax schedule and can engage in tax evasion. Money serves two purposes: the traditional one, modeled through a money-in-the-utility-function, and to facilitate tax evasion. It shows that income tax evasion leads to the violation of the Friedman rule that will otherwise hold.

Keywords: Monetary policy; fiscal policy; redistribution; the Friedman rule; tax evasion; overlapping-generations; second best

JEL-codes: E52; H21

36 pages, First version: June 27, 2012. Revised: June 5, 2014.

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Published as
Firouz Gahvari and Luca Micheletto, (2014), 'The Friedman rule in an overlapping-generations model with nonlinear taxation and income misreporting', Journal of Public Economics, vol 119, pages 10-23

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