Costly Tax Enforcement And Financial Repression: A Reconsideration Using An Endogenous Growth Model

Abstract

Using a monetary endogenous growth overlapping generations model characterized by financial repression, purposeful government expenditures and costly tax enforcement, we analyze whether financial repression can be explained by the cost involved in raising taxes. Note financial repression is modeled via “high” obligatory reserve requirements that banks in the economy need to hold. We show that higher costs of tax collection produce a monotonic increase in reserve requirements. Moreover, the government tends to rely more on indirect taxation, compared to direct taxation, as costs of tax collection increases.