Inflation, Tariffs and Tax Enforcement Costs

This paper derives the dependency of optimal tariff and inflation tax on tax collection and enforcement costs. The analysis is done for a small, open economy. The existence of such costs can justify tariff and inflation tax policies as optimal revenue-raising devices. This paper suggests that greater government demand for revenue will increase the use of inflation and tariffs as revenue devices. The analysis derives elasticity rules that tie optimal tariff and inflation rates to the costs of tax collection.