Taxes and the Price Level: A Further Examination of the PPP Hypothesis
February 1, 1993
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Summary
The effects of taxation on the general price level have traditionally been regarded as reflecting monetary policy, rather than fiscal factors. This view abstracted from the possible endogeneity of monetary expansion with respect to tax hikes, and from the effects which taxation may have on the reserve price of entrepreneurial labor. An analysis of Purchasing Power Parity data for 51 countries from stage IV of the ICP project supports the hypothesis that domestic indirect taxes tend to raise the general price level. In contrast to the accepted view, other prices do not seem to decline to offset the effect of such taxes on the price of tradables. The paper also presents some new evidence on the other factors which cause national price levels to diverge from PPP.
Subject: Consumption taxes, Foreign exchange, Income, Income and capital gains taxes, National accounts, Purchasing power parity, Tax incidence, Tax policy, Taxes
Keywords: Central America, Consumption taxes, general price level, Income, Income and capital gains taxes, per capita income, power term, price effect, price equalization, price fall, price level compendia, price level difference, price level index, price level variable, price-level differential, prices of tradables, Purchasing power parity, rate of exchange, service sector, Tax incidence, WP
Pages:
50
Volume:
1993
DOI:
Issue:
005
Series:
Working Paper No. 1993/005
Stock No:
WPIEA0051993
ISBN:
9781451842104
ISSN:
1018-5941
