American Economic Journal:
Macroeconomics
ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)
Optimal Taxation of Inflation
American Economic Journal: Macroeconomics
(pp. 64–93)
Abstract
This paper analyzes the effectiveness of a tax on inflation policy (TIP), which would require firms to pay a tax proportional to the increase in their prices or wages, in stabilizing inflation. We show that TIP would effectively correct externalities in firms' pricing decisions, tackle excessive inflation and reduce output volatility. While proposals from the 1970s saw TIP as a substitute for MP, we find that they are complementary, with TIP addressing cost-push shocks, and MP addressing demand shocks. In sharp contrast with price controls, TIP doesn't exacerbate relative price distortions.Citation
Capelle, Damien, and Yang Liu. 2026. "Optimal Taxation of Inflation." American Economic Journal: Macroeconomics 18 (4): 64–93. DOI: 10.1257/mac.20240248Additional Materials
JEL Classification
- D21 Firm Behavior: Theory
- D62 Externalities
- E12 General Aggregative Models: Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
- E31 Price Level; Inflation; Deflation
- E52 Monetary Policy
- E64 Incomes Policy; Price Policy
- H21 Taxation and Subsidies: Efficiency; Optimal Taxation