TAX DISTORTIONS IN A NEOCLASSICAL MONETARY ECONOMY

In this paper we use the common perspective provided by the neoclassical growth model to evaluate the size of the distortions associated with different monetary and fiscal policies designed to finance a given sequence of government expenditures. We calibrate a neoclassical monetary economy to match important features of the U.S. economy and use it to provide a quantitative assessment of the welfare costs of government policies involving different combinations of taxes on capital and labor income, consumption, and money holdings. In addition we evaluate the welfare gains from tax reforms designed to replace the tax on capital income with other forms of taxation. © 1992.