Market power and output-based refunding of environmental policy revenues

Output-based refunding of environmental policy revenues combines a tax on emissions with a production subsidy, typically in a revenue-neutral fashion. With imperfect competition, subsidies can alleviate output underprovision. However, when market shares are significant, endogenous refunding reduces abatement incentives and the marginal net tax or subsidy. If market shares differ, marginal abatement costs will not be equalized, and production is shifted among participants. In an asymmetric Cournot duopoly, endogenous refunding leads to higher output, emissions, and overall costs compared with a fixed rebate program targeting the same emissions intensity. These results hold whether emissions rates are determined simultaneously with output or strategically in a two-stage model.     

A note on progression,penalty schemes and tax evasion

This note deals with the question of whether shifting the tax base towards more progression will stimulate or discourage tax evasion, when the tax base is shifted so that either the expected tax revenues of government or the expected utility of taxpayer will remain unchanged. The answer turns out to depend sensitively on the nature of penalty schemes if caught in tax evasion. If the penalty rate is charged on the undeclared income, tax evasion will increase, while if the penalty rate is charged on the evaded tax, tax evasion will decrease when the tax base is shifted towards progression.     

Globalization, Asymmetric Tax Competition, and Fiscal Equalization

Trade integration and the increasing mobility of firms have raised the need for international coordination in corporate tax. In this paper, we study the ability of fiscal equalization to avoid the misallocation of capital across asymmetric countries arising from tax competition. Such a reform respects the principle according to which the tax decision is entirely left up to the nation and links nations engaged in strategic tax policy by transfers. We use a model of trade and location where firms produce under imperfect competition. Our analysis suggests that falling trade costs increase the distortion created by tax competition in the international allocation of production. However, we show that fiscal equalization based on differences in tax revenues or tax base can implement a more efficient tax wedge and spatial allocation of the tax base.     

The trade-off between risk and incentives in fiscal federalism: Evidence from China

A central argument of the second-generation fiscal federalism literature is that allocating a considerable share of tax revenue to local governments can provide fiscal incentives for local officials to promote economic growth. However, increasing incentives will increase the costs of uncertainty if local government officials are risk averse. Building on the insights of the classic principal-agent models, we predict that the optimal share of tax revenues retained by local government will decrease as the uncertainty of total tax revenues increases. Using Chinese provincial data, we find a robust negative relationship between volatility and the tax-sharing ratio at the sub-provincial level. Our results indicate that optimal decentralization in developing countries balances the trade-off between risk and incentives.     

A Simple Model of Corporate Bailouts in a Globalized Economy*

In this paper, we explore how globalization influences the decision of governments to rescue inefficient domestic firms when bailouts affect firms’ markup. We develop a model of international trade in which immobile domestic-owned enterprises (DOEs) compete with foreign-owned enterprises (FOEs) in an oligopolistic market. The decision to bail out DOEs leads to lower corporate tax revenues if FOEs are immobile, whereas tax revenues might increase if FOEs are mobile. Interestingly, the mobility of FOEs makes governments more prone to rescuing inefficient domestic firms because tax competition reduces the opportunity cost of a bailout policy in terms of public good provision.     

Unions, government's preference, and privatization

By introducing the government's preference for tax revenues into the theoretical framework of unionized mixed oligopolies, this study investigates the efficiency of privatization. The results are twofold. First, regardless of the government's preference for tax revenues and the number of private firms, the government and the public firm do not always have an incentive to privatize the public firm even if the government places lesser emphasis on the tax revenues than on social welfare. Second, social welfare increases with an increased number of private firms regardless of the government's preference for tax revenues and decreases with the government's preference for tax revenues regardless of the number of private firms. Hence, the government can use tax more efficiently as a commitment device to control the union's wage demand so as to maintain lower wage level under unionized mixed oligopoly.     

Frontiers of Climate Change Economics

The potential of taxes to correct environmental externalities has long been recognized among economists. Yet, this welfare-enhancing policy commonly faces strong opposition by citizens. Conversely, externality-correcting subsidies frequently enjoy high public support. We conduct a lab experiment to explore public support for Pigouvian taxes and subsidies. In an experimental market with a negative externality, participants vote on the introduction of Pigouvian taxes and subsidies under full or reduced information concerning how the tax revenues will be spent and the subsidy paid for. Theoretically the two instruments should produce identical outcomes. However, we find substantially greater support for subsidies than for taxes. This can partially be explained by the participants’ expectation that the subsidy will increase their own payoffs more than a tax, but not because it is expected to be more effective in changing behavior. Furthermore, we find that with greater uncertainty, the preference for subsidies is even stronger, a result which is consistent with loss aversion.     

Optimal combination of innovation and environmental policies under technology licensing

Under what conditions will a carbon tax encourage environmental innovation? Can a regulator design an optimal environmental policy to reduce emissions and to promote clean technologies? This paper studies optimal environmental policy in the situation where a monopoly innovator develops and licenses clean production technologies to downstream polluting firms. We find that (i) a higher emission tax will encourage innovation when the burden of the tax payment in the polluters' costs and/or the price-elasticity of the demand for polluting goods are small, (ii) the innovation-inducing effects of emission tax are inversely related to the emission-reduction (Pigouvian) effects of the tax, and (iii) the social optimum can be achieved by the mix of tax and subsidy. We also show that if the policy instrument is limited to the tax, the second-best tax rate would lie between the marginal damage and the first-best rate. By performing numerical simulations, we also demonstrate that the optimal mix of the emission tax and R&D subsidy can have “double dividend” benefits.     

A Note on Emissions Taxes and Incomplete Information

In contrast with what we perceive is the conventional wisdom about setting a second-best emissions tax to control a uniformly mixed pollutant under uncertainty, we demonstrate that setting a uniform tax equal to expected marginal damage is not generally efficient under incomplete information about firms’ abatement costs and damages from pollution. We show that efficient taxes will deviate from expected marginal damage if marginal damage is increasing and there is uncertainty about the slopes of the marginal abatement costs of regulated firms. Moreover, tax rates will vary across firms if a regulator can use observable firm-level characteristics to gain some information about how the firms’ marginal abatement costs vary.     

Population growth and the benefits from optimally priced externalities

"In this article we show that, considering only economic effects, even if population growth, by natural increase or immigration, increases congestion, pollution, and other forms of external costs, that provided pre-existing citizens own the resources giving rise to the externalities, and provided they efficiently price usage of such, that existing citizens must, in net average terms, be better off with population growth than without it. In simple terms the increased revenues they gain from efficient pricing at increased demand levels will be strictly greater than the monetary value of the increased external costs together with the higher tax costs they incur as consumers of the resources."     

Tax Havens,Growth, and Welfare

This paper develops an endogenous growth model featuring tax havens, and uses it to examine how the existence of tax havens affects the economic growth rate and social welfare in high‐tax countries. We show that the presence of tax havens generates two conflicting channels in determining the growth effect. First, the public investment effect states that tax havens may erode tax revenues and in turn decrease the government's infrastructure expenditure, thereby reducing growth. Second, the tax planning effect of tax havens reduces marginal cost of capital and hence encourages capital accumulation so as to spur economic growth. The overall growth effect is ambiguous and is determined by the extent of these two effects. The welfare analysis shows that tax havens are more likely to be welfare‐enhancing if the government expenditure share in production is low, or the initial income tax rate is high. Moreover, the welfare‐maximizing income tax rate is lower than the growth‐maximizing income tax rate if tax havens are present.     

Corporate tax evasion: The case for specialists

We analyze the role of accounting specialists who help corporations evade/avoid taxes in a game of incomplete information played by a tax authority, corporate taxpayers, and an accounting specialist. In addition to a full equilibrium characterization, we establish that (i) marginal changes in enforcement are not effective when evasion/avoidance is pervasive; (ii) fines on firms as opposed to specialists are more effective in such situations; (iii) reducing auditing costs and increasing “creative accounting” costs are effective in curbing evasion when tax compliance is relatively high.     

Privatization when the public firm is as efficient as private firms

The literature on mixed oligopoly shows that when production costs are quadratic the public firm is privatized if the competition in the product market is high enough. Similarly, when the public firm is less efficient than private firms and the marginal costs of production are constant, the government privatizes the public firm if its efficiency is low enough. In this paper we analyze this issue assuming that the public firm maximizes the weighted sum of consumer surplus, private profit and the profit of the public firm. If all firms have the same marginal cost of production we obtain that for some value of parameters the government does not privatize the public firm regardless of how many private firms are competing in the product market. We also obtain that the consumer surplus can be lower in the mixed oligopoly than in the private oligopoly.     

气候政策的时间不一致性问题研究

经验证据表明,很多国家都很难严格执行既定的气候政策。从理论上证明追求社会福利最大化的政府在经济剩余、政府税收收入和碳排放的负外部性等多重目标约束条件下,实施碳税政策时会产生时间不一致现象。结果表明,即使考虑到公共资金的边际成本,由于企业投资的不可逆转性和沉淀性,相对社会最优而言政府也会在事后降低碳税率,导致更多的能源消费和更多的碳排放。为克服时间不一致问题带来的效率损失,建议政府应建立独立的碳排放管制机构,对碳税政策做出可置信的承诺,改变电源结构,鼓励减排技术的投资,完善碳交易市场。     

Optimal pollution taxation in a Cournot duopoly

It is well known that the optimal pollution tax in a competitive industry is equal to the marginal damage inflicted by the pollution. It has also been shown that the optimal pollution tax on a monopoly is less than the marginal damage. In this paper, I derive the optimal pollution tax for a Cournot duopoly. If firms have different production costs, the optimal tax rate may exceed the marginal damage. This is so because the tax may be an effective instrument for allocating production from the less to the more efficient firm. It is also shown that, if one firm has a positive most preferred pollution tax, the sum of consumer and producer surpluses will be declining in the tax at this level.     

The Enforcement of Income Tax Laws: Efficiency Implications*

Complete enforcement of income tax laws, designed to reduce income tax evasion to zero, is shown to be inefficient. Starting from a 'full compliance' policy, it is shown that a marginal reduction in enforcement will always allow for tax reductions, hence increases in the ex-ante utility levels of taxpayers. Only if the tax structure is rigid can full compliance be optimal.     

Fiscal Effects of Minimum Wages: An Analysis for Germany

Abstract. Against the background of the current discussion of statutory minimum wages in Germany, this paper analyzes the potential employment and fiscal effects of such a policy. Based on estimated labor demand elasticities obtained from a structural labor demand model, the empirical results imply that minimum wages in Germany will be associated with significant employment losses among marginal and low- and semi-skilled full-time workers. Even though minimum wages will lead to increased public revenues from income taxes and social security benefits, they will result in a significant fiscal burden, due to increased unemployment benefits and decreased revenues from corporate taxes.     

Firm’s tax evasion in a principal-agent model with self-protection

Gatekeepers have an increasing role in taxation and regulation. Whereas burdening them with legal liability for misconducts that benefit those who resort to their services actually discourages wrongdoings—as will be clarified in the article—an alienation effect can also arise. The gatekeeper might become more interested in covering up the illegal behavior. This article studies the problem with respect to tax evasion by firms in a principal-agent framework. It highlights the role of legal rules pertaining to liability for tax evasion in shaping the choices of the parties, as concealment costs vary according to whether the risk-neutral principal or the riskaverse agent is held responsible when tax evasion is detected. The main result of the analysis is that there is a simple ex post test that can be carried out to infer whether harnessing the agent was socially beneficial.     

Top marginal taxation and economic growth

The article explores the relationship between top marginal tax rates on personal income and economic growth. Using a data set of consistently measured top marginal tax rates for a panel of 18 OECD countries over the period 1965–2009, this article finds evidence in favour of a quadratic top tax–growth relationship. This represents the first reported evidence of a nonmonotonic significant relationship between top marginal income tax rates and economic growth. The point estimates of the regressions suggest that the marginal effect of higher top tax rates becomes negative above a growth-maximizing tax rate in the order of 60%. As top marginal tax rates observed after 1980 are below the estimated growth-maximizing level in most of the countries considered, a positive linear relationship between top marginal tax rates and GDP growth is found over the sub-period 1980–2009. Overall, results show that raising top marginal tax rates which are below their growth maximizing has the largest positive impact on growth when the related additional revenues are used to finance productive public expenditure, reduce budget deficits or reduce some other form of distortionary taxation.     

Tax Enforcement Policy and the Provision of Public Goods with the Presence of Tax Havens

A tax competition model is presented to investigate the effects of tax havens on the public good provision. We show that when countries facing a rise in tax havens change their tax enforcement strategies in response, the existence of tax havens may result in a higher level of equilibrium public good provision as compared to the case with no tax havens. Accordingly, tax havens could be welfare enhancing for non‐haven countries. This result offers a possible explanation for the recent empirical evidence that the corporate tax revenues in high‐tax countries have actually increased with the growth in the flow of foreign direct investment to tax havens.