تامین مالی هزینه های دولت در اقتصاد باز

We study the growth and welfare effects of alternative modes of government finance within a small open economy. Using a model that allows for currency substitution and income-tax evasion, we find that seigniorage finance has stronger negative implications for growth over income-tax finance, in countries with less-developed financial markets. This result is reinforced when in these countries income-tax evasion is limited, a large share of foreign currencies is circulating, and when foreign currencies are close substitutes to the domestic currency. From a welfare perspective, the least distortionary method of financing a given amount of government expenditures is by means of income taxes.

Different modes of public finance may have different implications for the macroeconomy. Consequently, assessing the relative costs of alternative forms of government finance is an important issue. This paper compares the long-run growth and welfare effects of seigniorage finance versus income-tax finance in the provision of a productive government input that is employed in private production. In this developing economy, the government's ability to collect revenue is affected by the fact that agents can evade an inflation tax by holding a foreign currency, as well as evade income taxes.1 A few studies have compared the effects of fiscal and monetary financing policies of government spending on growth and welfare. This research has concluded that both methods of finance are growth-distorting. The results, however, appear to be conflicting as to the preferred financing scheme. For example, Palivos and Yip (1995) and Espinosa-Vega and Yip, 1999 and Espinosa-Vega and Yip, 2002 suggest that seigniorage financing distorts growth less than income-tax financing. De Gregorio (1993), on the other hand, indicates that seigniorage is more detrimental to growth as long as changes in the rate of inflation have a substantial effect on the rate of return of bonds. Pecorino (1997) combines these views by recommending a simultaneous use of both policies. A common characteristic of these studies is the use of a closed-economy framework. This, however, restricts the analysis since the economies that tend to rely on inflation taxation to generate a substantial portion of their revenue are small open economies. These economies are likely to face serious choices about alternative modes of government finance due to a low tax base, a corrupt tax administrative mechanism, or even a high level of political instability. Moreover, many of the theoretical studies on seigniorage and endogenous growth abstract from the feedback effect of inflation on seigniorage. Hence ignoring the fact that in an open economy inflation often leads to currency substitution.2 As a result, these studies fail to account for the negative impact of currency substitution on revenue raised by seigniorage, and subsequently on the ranking of the financing policies. Furthermore, the costs associated with collecting income taxes may alter the economic effects of such a financing policy, and hence its effectiveness against the alternatives. Therefore, accounting for both income-tax evasion and currency substitution is important when ranking the financing options for governments in developing economies. The current paper extends the existing growth literature on the relative costs/merits of different forms of government finance by building on the work of Palivos and Yip (1995). In particular, our analysis departs in three major directions. First, we abandon the closed-economy framework, and instead consider the effects of government revenue policies in a small-open-economy environment. Second, we model the presence of currency substitution, where we also allow the elasticity of substitution between domestic and foreign currencies to vary. In this framework, we introduce the use of money through a liquidity-in-advance constraint that requires all consumption purchases and a fraction of investment transactions to be made using both domestic and foreign currencies. Indirectly, this fraction of investment purchases represents the level of financial development of the economy. Third, we consider an inefficient income-tax collection system to provide a possible explanation of why the governments in less-developed countries use seigniorage extensively as an alternative source of revenue. The model we develop solves for an expression that analyzes the interaction between currency substitution, income-tax collection, financial development, and economic growth. This expression is used to rank numerically the growth and welfare effects of financing a given ratio of expenditures to income with (combinations of) the two government budgetary policies. To obtain the quantitative results, the model is calibrated to several developing economies. We find, consistent with the literature, that raising revenue with either seigniorage or income taxes reduces the rate of economic growth. The adverse growth effects of seigniorage, however, are stronger than those of income taxes for less financially developed economies. Furthermore, the existence of currency substitution (income-tax evasion) enhances the detrimental growth effect of seigniorage (income taxation) making such a policy, typically, less attractive for countries with a relatively high circulation of foreign currencies (inefficient income-tax collection system). We also investigate situations where the government has access to both forms of finance simultaneously. We find that a policy mix that relies more heavily on seigniorage (income taxes) is likely to be more effective when currency substitution is less extensive (income-tax collection is more efficient), and/or when the two currencies are complements (substitutes) rather than substitutes (complements) in transactions. Finally, we examine the welfare consequences of the two budgetary methods and find that an expansion of government spending financed with either method reduces welfare, although in a quantitatively dissimilar way. In addition, substituting seigniorage with income taxes in order to finance a given amount of spending reveals welfare enhancing effects. The rest of the paper is organized as follows. Section 2 develops the model. Section 3 derives the balanced growth path and the money demand equations for the small open economy. Section 4 analyzes the expressions for the growth rate under the different financing methods. Section 5 motivates our calibration and compares the growth and welfare effects of the two budgetary schemes. The final section offers brief conclusions.

This paper uses a fairly simple endogenous growth model to evaluate the relative merits of financing productive government capital with seigniorage and income taxes. The open economy framework employed, with the additional features of currency substitution and income-tax evasion, characteristic of many developing economies, allow for further insights of the analysis. The numerical analysis suggests that income taxes are preferred, on growth grounds, in countries with less-advanced financial systems. This choice is reinforced when in addition these countries have a relatively efficient income-tax collection system, a large share of foreign currencies circulating, and when domestic and foreign currencies are close substitutes. From a welfare standpoint, although both financing policies reduce welfare for increases in government spending, income taxes maximize welfare for a given amount of spending. The analysis in this paper could be extended in several directions. The indicator of financial activity used could be perceived as an indirect measure of financial sophistication. Thus, explicit modeling of financial intermediaries who make portfolio decisions, in the spirit of Espinosa-Vega and Yip (1999), could prove useful in examining the effects of financial policies on countries at different stages of financial and economic development. Developing a multisector version of the model and allowing for the fact that income taxes can be easily collected in some sectors but not in others could also be a worthwhile extension. Finally, we should note that we have focused in the case where investment goods are purely domestic. This scenario, however, excludes foreign direct investment in the economy. Therefore, allowing for foreign capital to be subject to the LIA constraint and explicitly enter the domestic production process, in addition to domestic capital, could lead to further insights on the relative merits/costs of alternative government financing schemes.