How should environmental policy respond to business cycles? Optimal policy under persistent productivity shocks

How should environmental policy respond to economic fluctuations caused by persistent productivity shocks? This paper answers that question using a dynamic stochastic general equilibrium real business cycle model that includes a pollution externality. I first estimate the relationship between the cyclical components of carbon dioxide emissions and US GDP and find it to be inelastic. Using this result to calibrate the model, I find that optimal policy allows carbon emissions to be procyclical: increasing during expansions and decreasing during recessions. However, optimal policy dampens the procyclicality of emissions compared to the unregulated case. A price effect from costlier abatement during booms outweighs an income effect of greater demand for clean air. I also model a decentralized economy, where government chooses an emissions tax or quantity restriction and firms and consumers respond. The optimal emissions tax rate and the optimal emissions quota are both procyclical: during recessions, the tax rate and the emissions quota both decrease.     

Emissions Pricing Policies and Business Cycles: Fixed vs. Variable Tax Regimes

As by-products, emissions follow economic fluctuations. Ignoring this fact in environmental policies can lead to unexpected emissions fluctuations and an increase in intervention costs. Using a real business cycle model, we compare two policies: a fixed tax policy where the price is constant over time and a variable tax regime where the tax rate is set at the beginning of each period. We find that while both programs result in lower emissions, a variable tax regime is preferable since first, it can ensure that the maximum welfare is always achieved, and second, it is more effective in stabilising emissions.     

An integrated tax-subsidy policy for carbon emission reduction

A carbon tax is often cited by economists as an effective instrument to mitigate greenhouse gas emissions, but there is little political interest in the United States. In light of this political unpopularity, we develop and examine a net-revenue constrained carbon tax and subsidy program. The optimal revenue constrained tax and subsidy schedule based on our utility maximization model taxes energy sources with high emissions to energy price ratio, and subsidizes sources with low emissions to energy price ratios. This approach may be more palatable than a traditional carbon tax because it can change the relative price of low and high emissions energy sources while providing a mechanism to limit net tax increases and energy price increases. We find that a constrained tax/subsidy program provides welfare gains relative to a no-tax scenario. Welfare gains are estimated to be 1% and 36% of the welfare gains from a Pigouvian tax for the motor fuels industry and electric power industry, respectively. In contrast, subsidies for low-emitting energy sources funded from general tax funds rather than from high-emission energy tax revenues lead to welfare decreases substantially below our proposed tax/subsidy policy approach.     

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.     

Tax incentives and the decision to purchase long-term care insurance

This paper studies the impact of the tax incentive prescribed in the Health Insurance Portability and Accountability Act of 1996 (HIPAA) on individuals' long-term care insurance purchasing behavior. Using data from the Health and Retirement Study, we find that the tax incentive in HIPAA increased the take-up rate of private LTC insurance by 3.3 percentage points, or 25%, for those eligible. Despite this seemingly strong response, our results imply that even an above-the-line tax deduction would not increase the coverage rate of seniors beyond 13%, indicating that tax incentives alone are unlikely to expand the market substantially. We also present, to our knowledge, the first estimate of the price elasticity of demand for LTC insurance of around ? 3.9, suggesting that demand is highly elastic at the current low ownership rate. Finally, we evaluate the net fiscal impact of the tax incentive and find that the tax deductibility of LTC insurance premiums leads to a net revenue loss for the government, as the reduced tax revenue from granting the tax incentive exceeds the savings in Medicaid's LTC expenditures.     

企业年金税收政策的分析框架

文章在一个两期政府消费模型中,讨论了税收政策对企业年金计划的影响。政府的减税政策取决于初始的财政状况、偏好、对年金的控制权以及法定养老金的缴存率等。税收政策的有效性取决于企业年金计划的激励效果,当前的税收政策是不同级别政府、公平与效率、长期与短期博弈的结果。目前年金税收政策有效性的前提条件并不具备,政策的重点不应集中在统一的税收优惠政策的颁布,而应逐步完善其前提条件。     

目标替代率下的企业年金缴费率——基于税收优惠视角分析

企业年金作为我国养老保险体系中的第二支柱,因缺乏税收优惠政策而发展滞后,难以形成对基本养老保险的有力补充。通过将税收优惠政策和企业年金缴费率联系在一起进行考察,建立年金基金平衡模型,计算出为实现企业年金的目标替代率政府应实行多大程度的税收优惠政策。并运用成本——收益理论对这一税收优惠政策进行可行性评价,最终得到企业年金税收优惠政策能够以较小成本换来企业年金较大发展,并能够较大程度地提高整个社会福利水平的结论。     

Strategic environmental policy and the accumulation of knowledge

In dealing with a transnational pollutant-emitting duopoly welfare-maximising policy makers face two negative externalities: imperfect competition and unpriced emissions. Strategic environmental policy models show that these externalities involve a trade-off between reducing pollution and allowing for rent-seeking of the respective firm. This dilemma usually results in a suboptimal internalisation of the negative externality emerging from emissions. Indeed, the conventional model setup includes an R&D stage that enables the firms to mitigate regulation costs. But the typical one period configuration ignores that R&D expenditures create knowledge capital which is, due to its inherent cumulativeness, also effective in following periods. Our model analyses the established trade-off in a two period setting and therefore allows for an investigation of intertemporal knowledge accumulation. We find that the intertemporal effects provide an incentive for a policy maker to set a higher tax rate compared to a one-period setup which lessens the magnitude of the suboptimal internalisation of emissions. Under certain conditions even a tax rate above the Pigouvian level is possible in period 1.     

Imperfect Capital Mobility and Local Government Behaviour in a Two‐Period Economy

One clear result in the tax competition literature is that, when head taxes on immobile residents are available, the optimal capital tax rate for local government is zero. However, zero tax rate, when resident taxes are available, is incompatible with the phenomenon actually observed. In most countries, local governments use capital taxes as policy variables for choosing a nonzero tax rate. This paper presents a model of a two‐period economy with imperfect mobile capital to explain the behaviour of local government providing capital subsidies on capital. It further examines an equilibrium tax rate where local government’s objectives include Niskanen‐type revenue‐maximizing.     

Can Trade Be Good for the Environment?

We analyze the impact of trade in a differentiated good on environmental policy when there is local and transboundary pollution. In autarky, the (equivalent) pollution tax is set equal to the marginal damage from own emissions. If the strategic policy instrument is a tax, leakage occurs under trade and tends to lower the tax. The net terms of trade effect, due to the exportable and importable varieties of the differentiated good, tends to increase the tax. We derive conditions under which pollution taxes under trade are higher than the marginal damage from own emissions, i.e., higher than the Pigouvian tax and than that under autarky. Then, pollution falls under trade relative to autarky. When countries use quotas/permits to regulate pollution, there is no leakage, while the net terms of trade effect tends to make pollution policy stricter. The equivalent tax is always higher than the marginal damage from own emissions, i.e., always higher than the Pigouvian tax and than that under autarky; hence, pollution always falls under trade. Our analysis provides some insight into the findings in the empirical literature that trade might be good for the environment.     

Fiscal policy under a minimum‐time objective

In an endogenous growth model, we characterize the fiscal policy driven by a minimum‐time objective of economic development. We find that in equilibrium government should levy the highest possible consumption taxes, reduce public expenditures to the lowest possible level, and keep labor income tax rate and capital income tax rate satisfy a substitution relationship at the balanced budget constraint. We also identify the condition under which income tax rate should be set to zero. We further find that the equilibrium fiscal policy is equivalent to the growth‐maximizing fiscal policy, whereas it generally deviates from the welfare‐maximizing fiscal policy. We hence identify a circumstance where setting the policy goal of reaching an economic‐performance target as soon as possible cannot be justified in the sense of maximizing the welfare of households.     

Monetary policy,endogenous transactions,and financial market segmentation

An endogenous financial market segmentation model is constructed to explore the role of costly credit as a medium of exchange in the monetary policy elasticity of financial market activity. Against inflation risk, credit is an alternative insurance device to a cash transfer from the financial market. In equilibrium, credit reduces the financial market activity rate. Monetary policy has redistributive effects across economic individuals. Inflation may not tax financial market non-participants. However, it may tax financial market participants by increasing the financial market activity rate. Welfare may increase and the optimal money growth rate can be positive.     

Optimal Social Insurance with Linear Income Taxation*

We study optimal social insurance aimed at insuring disability risk in the presence of linear income taxation. Optimal disability insurance benefits rise with previous earnings. Optimal insurance is incomplete even though disability risks are exogenous and verifiable so that moral hazard in disability insurance is absent. Imperfect insurance is optimal because it encourages workers to insure themselves against disability by working and saving more, thereby alleviating the distortionary impact of the redistributive income tax on labor supply and savings.     

Government policy to reduce pollution emissions within the overlapping generations model

This article develops an overlapping generations model with multiple categories of capital. The importance of this article is in its ability to analyse changes in the distribution of various categories of capital along the growth path of the economy. Economic growth is accompanied by capital growth as well as increase in pollution emissions. Implementing a government policy to reduce pollution emission would change the equilibrium path of capital distribution. Within the model, the government builds a corporate tax function that defines the tax rate as a function of a ‘desired’ pollution level. The tax rate decreases as the ‘desired’ pollution level is higher. When the ‘desired’ pollution level is higher than the actual pollution level, production is subsidized and pollution levels rise. An example and a simulation are presented in order to confirm the theoretical results and demonstrate that the model can be used for empirical analysis.     

Economic growth and polluting resources: Market equilibrium and optimal policies

This paper develops an endogenous growth model to study the decentralized equilibrium and the optimum conditions in an economy which uses polluting resources. The model includes two policy instruments, a subsidy to final consumption and an emissions tax. It also considers two forms of endogenous technical change, pollution-reducing knowledge and horizontal innovation. We show that, if the efficiency of knowledge to reduce emissions is sufficiently high, a higher output is compatible with lower emissions in both levels and growth rates. Additionally, if the two instruments are used together the economy may achieve a higher output and lower emissions since the subsidy may offset, at least partially, the negative tax effects.     

Optimal taxation with endogenously incomplete debt markets

Empirical analyses of labor tax and public debt processes provide prima facie evidence for imperfect government insurance. This paper considers a model in which the government's inability to commit to future policies or to report truthfully its spending needs renders government debt markets endogenously incomplete. A method for solving for optimal fiscal policy under these constraints is developed. Such policy is found to be intermediate between that implied by the complete insurance (Ramsey) model and a model with exogenously incomplete debt markets. In contrast to optimal Ramsey policy, optimal policy in this model is consistent with a variety of stylized fiscal policy facts such as the high persistence of labor tax rates and debt levels and the positive covariance between government spending and the value of government debt sales.     

Optimal Taxation of Risky Human Capital*

In a two‐period life‐cycle model with ex ante homogeneous households, earnings risk, and a general earnings function, we derive the optimal linear labor tax rate and optimal linear education subsidies. The optimal income tax trades off social insurance against incentives to work. Education subsidies are not used for social insurance, but they are only targeted at offsetting the distortions of the labor tax and internalizing a fiscal externality. Both optimal education subsidies and tax rates increase if labor and education are more complementary, because education subsidies indirectly lower labor tax distortions by stimulating labor supply. Optimal education subsidies (taxes) also correct non‐tax distortions arising from missing insurance markets. Education subsidies internalize a positive (negative) fiscal externality if there is underinvestment (overinvestment) in education because of risk. Education policy unambiguously allows for more social insurance if education is a risky activity. However, if education hedges against labor‐market risk, optimal tax rates could be lower than in the case without education subsidies.     

Corporate social responsibility,stock prices,and tax policy

We model a market in which some investors get utility from owning shares of firms that engage in corporate social responsibility (CSR). In equilibrium, investors' CSR considerations influence portfolio choices, stock prices, and CSR spending. We study tax policy designed to maximize total giving (individual and corporate) net of government tax breaks and find that its effectiveness is non‐monotonic in the proportion of altruistic investors: with few or many altruistic investors, it has little impact on giving, but, at intermediate levels, effective tax policy intuitively relates the corporate tax rebate rate on giving and the cap on allowable tax savings.     

Effects of Carbon Dioxide Control Policy in China by Multi-Regional CGE Model

In recent years, China has faced tremendous pressure to reduce carbon dioxide emissions. At the COP 15 United Nations Climate Change Conference in Copenhagen in 2009, China committed itself to achieve a 40%–45% per GDP carbon dioxide emission reduction in the near future. To reach this goal, China is willing to adopt a series of new policies, including attempts to introduce a carbon tax, and to start an energy-resource-tax pilot program in the western provinces. For this research, we constructed a Multi-Regional Computable General Equilibrium model. Then we used six scenarios to evaluate the economic effects and effectiveness of energy-resource tax policy for control of carbon dioxide emissions for different regions of China. The main result of this research is the finding that an ad valorem energy resource tax can reduce carbon dioxide emissions in China. At the same time, fiscal policy might engender different effects in different regions of China. Additionally, this policy is more efficient for controlling petroleum and natural gas resources than it is for coal resources.