Marginal tax rate and the optimal collection of seigniorage

Abstract

Since Threhan and Walsh (Journal of Monetary Economics, 25, 1990, 97–112) and Evans and Amey (Journal of Macroeconomics, 18, 1996, 111–125), the mixed evidence on the revenue-smoothing hypothesis is now well understood; and there is now a consistent body of empirical evidence, at least for the industrialized countries, confirming that the principles of optimal seigniorage and taxation are not being used to raise revenue. Previous empirical tests of the revenue-smoothing hypothesis have used a crude tax rate, measured as a ratio of the central government revenue to GNP. The distortionary costs associated with raising revenue, however, depend on the marginal tax rate. This paper tests the robustness of the empirical evidence on the revenue-smoothing hypothesis to using marginal tax rates in place of the crude tax rates employed in the existing literature. Both annual Canadian data for the period 1948 to 1991 and annual United States data for the period 1948 to 1983 reject the revenue-smoothing hypothesis. Revenue-smoothing considerations were therefore not central in determining the behaviour of seigniorage in Canada and the United States.