Optimal Tax Policy, Market Imperfections, and Environmental Externalities in a Dynamic Optimizing Macro Model

This paper develops a dynamic real business cycle model that highlights pollution externalities (on welfare and production) and market imperfections and uses it to determine the socially optimal tax policy that encompasses labor income, capital income, and emission taxes. We show that the optimal tax on capital and labor income only addresses the production inefficiency (and is time-invariant), while the tax on the environmental externalities affects both the production inefficiency and the environmental spillovers (and is time-varying). More interestingly, the socially optimal emission tax will be characterized by a Keynesian-like stabilizer that is designed to mitigate business cycle fluctuations, i.e., that will stimulate the economy with a lower emission tax during recessions. In a positive analysis, we show that the beneficial effects arising from pollution taxation will become larger the greater is the degree of the firms' monopoly power. In addition, a triple dividend in terms of improving environmental quality and increasing employment and firms' profit can be simultaneously realized if the environmental production externality is more significant and if the elasticity of intertemporal substitution in consumption is relatively small.     

International and Intergenerational Aspects of Capital Income Taxation in an Endogenously Growing World Economy

This paper discusses how capital income taxation affects economic growth and welfare in an endogenously growing world economy with perfect capital mobility and worldwide externalities. Worldwide externalities provide a mechanism for equalizing national growth rates even with different capital income tax rates. The welfare of future generations is more influenced by a change in the growth rate than by the international spillover effect, which has been the primary concern of the previous studies. Moreover, our model finds intergenerational conflicts arising from the change in the growth rate caused by a change in the source tax rate of the foreign country.     

Eco-Dumping, Capital Mobility, and International Trade

A small open economy’s optimal environmental policy is studied in a model with international capital mobility and local pollution. The country produces traded as well as non-traded goods. Is it in the country’s interest to engage in ecological dumping by choosing generous pollution allowances for the traded-good sector? The answer depends decisively on the policy regime in use. Dumping is not optimal if the country ensures that the implicit rent on pollution is completely appropriated within the country. However, if the implicit factor reward on pollution leaves the country because it accrues to (foreign) owners of mobile capital, the local welfare maximizing government tends to discriminate against the traded-good sector, the opposite of ecological dumping.     

Foreign Debt,Foreign Direct Investment and Volatility

We investigate how foreign debt and foreign direct investment (FDI) affect the growth and welfare of a stochastically growing small open economy. First, we find that foreign debt influences the growth of domestic wealth by lowering the cost of capital, while FDI affects the country's welfare by providing an additional source of permanent income. Second, a decline in domestic investment may improve domestic welfare as FDI replaces the gap. Even when the welfare deteriorates, its magnitude is mitigated, leaving more room for discretionary fiscal policy. Third, a fiscal policy aimed to stabilize domestic output fluctuations needs to be conducted not to crowd out the welfare benefit of FDI too much. Fourth, an economy with both types of foreign capital experiences wider welfare swings by external volatility shocks than the one with foreign debt alone, while the welfare effects from domestic volatility shocks are mitigated. The welfare effects of fiscal shocks are much smaller with both types of foreign capital. Lastly, the first-best labor income tax covers the government absorption by the labor's share of total output, and the capital income tax covers the rest. Investment is penalized or subsidized depending on the social marginal cost-gain differential.     

"十一五"时期促进我国企业技术进步的税收支持政策建议

在“十一五”时期,完善税收支持政策,促进我国企业技术进步,对于提升我国的国际竞争力、实现中华民族伟大复兴具有重要意义。为此,我们提出以下政策建议:巩固和完善“两项”政策,推进增值税转型,统一内外资企业所得税,进一步完善各项具体政策,完善鼓励产学研结合的政策,完善激励人力资本开发的政策,增设低技术污染税,完善税收与财政支持政策的配套使用。     

On the choice between capital import and labor export

The paper analyses some questions arising in connection with inflow of foreign capital into a host country and its free zone. When capital is mobile between sectors capital import into any part of the economy decreases welfare. With sector-specific capital, import of capital into the protected sector (export sector) decreases (increases) welfare. If capital import into the export sector of the domestic zone is infeasible, there may be a case for establishing a free zone and allowing capital import exclusively there. With a suitable tax policy, capital import into the free zone will always be beneficial.     

International Commodity Taxation under Monopolistic Competition

We analyze non‐cooperative commodity taxation in a two‐country trade model characterized by monopolistic competition and international firm and capital mobility. In this setting, taxes in one country affect foreign welfare through the relocation of mobile firms and through changes in the rents accruing to capital owners. With consumption‐based taxation, these fiscal externalities exactly offset each other and the non‐cooperative tax equilibrium is Pareto efficient. With production‐based taxation, however, there are additional externalities on the foreign tax base and the foreign price level that lead non‐cooperative tax rates to exceed their Pareto efficient levels.     

Quantitative Import Restrictions and Optimal Capital Taxes Under a System of Tax Credits

This paper examines the optimal capital tax policy under quantitative import constraints, and international capital tax credits. For a small capital-importing country, the optimal capital tax equals the foreign tax under a quota, and equals or exceeds the foreign tax under a VER. For a small capital-exporting country, the optimal policy towards capital is a zero tax under a quota, and a tax or a subsidy under a VER. Also examined are the welfare effects of capital taxes and trade liberalization, and the joint setting of the two policies, when both instruments are available to the government.     

Foreign-Investment Tax and Tariff Policies in Developing Countries

In this paper we examine the welfare effects of tax on foreign capital and tariff policies for a small open economy with sectoral unemployment. The individually and jointly optimal tax and tariff rates in the absence or presence of international tax credits are derived. A subsidy on foreign capital coupled with a tariff can be jointly optimal when tax credits are absent in the source country. However, the capital subsidy policy may fail to hold when the foreign country follows a tax credit system.     

The role of public infrastructure and subsidies for firm location and international outsourcing

This paper presents a model in which final goods producers outsource intermediate input production. Intermediate inputs are differentiated and their production can be located at home or abroad. The model is used to examine competitive location policy in a (two-country) free trade area (FTA). It is shown that national public infrastructure investment has a positive effect on both the number of intermediate input producers and the return to the immobile factor in the home country. International outsourcing from home declines. Opposite effects are triggered in the partner country. In a welfare analysis we characterize national infrastructure policies that aim to maximize national income (net of tax costs) and compare the non-cooperative FTA-equilibrium with optimal policies from an integrated point of view. We show whether or not there is a need for policy coordination. Firm subsidies are discussed as an alternative to public infrastructure investment.     

Tax Competition in Vertically Differentiated Markets with Environmentally Conscious Consumers

This paper analyses the effects of tax competition on environmental product quality, pollution and welfare in a two-country, vertically differentiated, international duopoly, in which consumers are environmentally conscious. The firm in each country chooses first the environmental quality of its product (which reflects the emissions generated in the production process) and then the price. In equilibrium one country will be more polluted than the other because firms choose different levels of environmental quality of their products. We find that a country’s optimal commodity tax is higher if the domestic firm is the more polluting supplier. Furthermore, non-cooperative commodity tax rates are inefficiently high in equilibrium. This is because, in this framework with environmentally aware consumers, commodity taxes affect the choice of firms regarding their emissions. Therefore, a domestic tax reduction not only raises the profits of the foreign firm but also lowers its emission levels, resulting in higher welfare for the other country. We also analyse the optimal cooperative and non-cooperative commodity and emission taxes with border tax adjustments. With these two policy instruments available, commodity taxes are higher.     

Imported inputs and privatization in downstream mixed oligopoly with foreign ownership

This paper examines welfare implications of privatization in a mixed oligopoly with vertically related markets, where an upstream foreign monopolist sells an essential input to public and private firms located downstream in the domestic country. The impact on domestic welfare of privatizing the downstream public firm is shown to contain three effects. The first is an output distortion effect, which negatively affects welfare since privatization decreases the production of final good for consumption. The second is an input price lowering effect resulting from a decrease in derived demand for the input. When the level of privatization increases, a decrease in final good production lowers input demand, causing input price to decline and domestic welfare to increase. The third is a rent‐leaking effect associated with foreign ownership in the downstream private firm. The rival domestic firm strategically increases its final good production, causing profits accrued to foreign investors to increase and domestic welfare to decline. Without foreign ownership in the downstream private firm, the optimal policy toward the public firm is complete privatization as the output distortion effect is dominated by the input price lowering effect. With foreign ownership, however, complete privatization can never be socially optimal due to the additional negative impact on domestic welfare of the rent‐leaking effect. We further discuss implications for domestic welfare under different privatization schemes (e.g., selling the privatization shares to the upstream foreign monopolist or to the rival domestic firm).     

Optimal Income Taxation and International Labour Mobility

This paper considers how a linear income tax should be set optimally when individuals are internationally mobile. The optimum tax analysis is founded on a social welfare function where each individual counts in the social welfare according to residence time in the home country. The discussion of the optimal income tax is organized from two perspectives. The first relates to the optimum income tax when a uniform lump sum transfer is used, while the second concerns the optimal rate of tax when a transfer is used which depends on time of residence in the taxing jurisdiction.     

On Cost Benefit Rules for Green Taxes

This paper concerns the welfare effects of a green tax reform in a dynamic general equilibrium model with preexisting taxes on labor income and capital income. In comparison with previous studies on green taxes in dynamic models, which have focused their main attention on long run effects of such reforms, I derive cost benefit rules for a change in the tax mix by using the properties of the value function in optimal control theory. This enables me to relate the welfare effect of a change in the tax mix to responses in employment, the capital stock, (flow) emissions and the stock of pollution along the whole general equilibrium path. Another contribution of the paper is to examine under what conditions an emission tax, which is set permanently below the marginal damage of pollution, is welfare superior to an emission tax path that fully internalizes the external effect.     

Location choice under trade and environmental policies

In this paper, we use a game theoretic model to analyze the trade-off between the attractiveness of FDI and the environmental damage caused by production under asymmetric information. In the first stage, the domestic developing country reveals the level of import tariff and pollution tax under information uncertainty about the environmental damage that the foreign firm can cause. The foreign firm from a developed country decides where to locate afterwards with complete information about its own damage. Results show that the developing country can be better off encouraging FDI if and only if the marginal damage of pollution is sufficiently low. The optimal level of pollution taxes attracting FDI is higher than the marginal damage of pollution. However, the optimal pollution tax without FDI can be lower than the marginal damage of pollution with sufficiently high demand in the developing country.     

On the Effects of Commodity Tax Under Free Entry Oligopoly in the Presence of Export Market

If the inverse demand function in the domestic country is concave, or it is not too convex even if it is convex, a small specific commodity tax raises the social welfare in the domestic country and lowers the welfare of the foreign consumers, and the optim- al tax for the domestic country is positive. The presence of an export market enlarges the possibility that a specific commodity tax raises the social welfare in the domestic country at the sacrifice of the welfare of the foreign consumers. [L13]     

Efficient Dynamic Pollution Taxation in an Uncertain Environment

This paper analyzes efficient pollution taxation within a stochastic model of endogenous growth. Pollution is a by-product of production and causes disutility. Furthermore, the productivity which results from environmental quality is uncertain. This reflects e.g. uncertain capital depreciation induced by natural disasters like hurricanes or floods. This uncertainty is shown to raise an ambiguous impact on the optimal pollution level as well as on optimal environmental taxation. Market equilibrium turns out to be suboptimal, since the households mis-perceive their individual impact on pollution. Conditions for welfare maximizing pollution taxation are stated and it is shown that a direct pollution tax is not appropriate to yield Pareto-optimal growth. Instead, a linear capital income tax together with a linear abatement subsidy build an efficient tax scheme, if secondarily the governmental budget is balanced. Moreover, an increase in the riskiness of environmental productivity may even lead to an increase in the optimal pollution level and to a decrease in optimal environmental taxation, depending predominantly on the preference parameters.      

Capital income taxation in a growing world economy

This paper deals with dynamic adjustment in large economies to changes in the rate of capital income taxation or in the rate of investment tax credit in one country. The framework applied in the paper is a continuous-time, overlapping generations model with two countries. It features population growth and debt non-neutrality. We address impact and steady state effects of capital income tax and investment subsidy changes in the home country on consumption per capita, the capital intensity, and the per capita net foreign asset position in both countries. We also briefly consider individual welfare consequences of these policies.     

Consequences of a tax on the brain drain for unemployment and income inequality in less developed countries

Welfare implications of an income tax paid by emigrant skilled workers are analyzed in a model which assumes international capital mobility and allows for unemployed labor in the modern sector of a developing country. The tax discourages overinvestment in education and also contributes to the welfare of those remaining through the direct revenue effect. However, expected earnings of unskilled workers decline as a result of the tax, while those of non-migrant skilled workers rise. The tax may thus exacerbate domestic income inequality. In addition, modern sector employment, output, and capital stock may fall.     

Constrained Inefficiency and Optimal Taxation with Uninsurable Risks

When individuals' labor and capital income are subject to uninsurable idiosyncratic risks, should capital and labor be taxed, and if so how? In a two‐period general equilibrium model with production, we derive a decomposition formula of the welfare effects of these taxes into insurance and distribution effects. This allows us to determine how the sign of the optimal taxes on capital and labor depend on the nature of the shocks and the degree of heterogeneity among consumers' income, as well as on the way in which the tax revenue is used to provide lump‐sum transfers to consumers. When shocks affect primarily labor income and heterogeneity is small, the optimal tax on capital is positive. However, in other cases a negative tax on capital is welfare‐improving.