Laffer Curve Under Code Constraints
Abstract
This paper studies how code constraints provided by the decentralized financial market infrastructure (dFMI) alter the inflation‑tax space of sovereign states. When economic agents are able to obtain liquidity outside the traditional banking system via the dFMI, the government’s control over the inflation‑tax base is constrained by this code‑based external mechanism. Within a small open economy framework, we parameterize this constraint and show that, by depressing demand for the domestic currency and amplifying its sensitivity to inflation, it systematically compresses both the peak and the feasible range of the seigniorage Laffer curve. Our analysis of the asymmetry of this constraint mechanism shows that, in the case of the United States, it operates as an “internal reallocation under a common unit of account”: as the United States exports dollar liquidity through the on‑chain dollar system, it simultaneously draws a rigid upper bound on its own high‑inflation paths. By contrast, for economies whose domestic currency is not the U.S. dollar, the constraint takes the form of external competition across units of account, subjecting the domestic‑currency tax base to more asymmetric structural pressures.
Keywords: E52(Monetary Policy), G23 (Non-bank Financial Institutions, Financial Instruments, Institutional Investors), O33 (Technological Change: Choices and Consequences, Diffusion Processes), H21 (Efficiency, Optimal Taxation)
JEL Classification: E52, G23, O33, H21
Tian, Yuan,
Laffer Curve Under Code Constraints(March 13, 2026). Available at SSRN: https://ssrn.com/abstract=6887818 or http://dx.doi.org/10.2139/ssrn.6887818