Income taxes and the demand for money: a quantitative analysis

Abstract

In a previous paper by the author, the effects that taxes in general and income taxes in particular might have on an individual’s choice between holding money and holding other assets was called to attention. An empirical study was thus performed how this choice could be expected to be affected when an income tax was introduced or was changed. Milton Friedman, while agreeing with the basic hypothesis, later raised serious and justifiable questions about the empirical part of the paper. The present paper, therefore, takes account of Friedman’s objections and subjects the earlier hypothesis to a somewhat more rigorous empirical test.

JEL: E41, E64, H24