Foreign direct investment under a weak rule of law

We have developed a self‐enforcing contract model to show that better economic fundamentals can help an area or a region under a weak rule of law – but with order – to attract foreign direct investments (FDIs), whereas lowering taxes does not necessarily help. Using a cross‐region Chinese dataset, we find evidence consistent with our theoretical analysis. Regional variations in tax rates and the perceived quality of formal contracting institutions are not correlated with regional FDI inflows, but leadership characteristics are. Most conventional economic factors have the predicted effects on FDIs. The finding that FDI is lower in locations where domestic private firms have better access to finance and where the air quality is poor is also new to the literature.     

碳税征收对经济增长与产业结构影响的实证分析

征收碳税已成为众多国家推动低碳经济发展的重要经济措施之一。为了检验征收碳税对中国经济增长可能造成的影响,对征收碳税与经济增长的关系进行实证分析,得出以下结论:征收碳税对经济增长的影响存在显著的地域和行业差异,在较低强度的碳税政策下,碳税对中东部地区大部分省份的经济增长有促进作用,但阻碍中西部地区一些省份的经济增长;同时,征收碳税对大多数行业的发展起推动作用,却不利于少数行业的发展。     

How do market reforms affect China's responsiveness to environmental policy?

A large percentage of total investment in China is allocated by the central government at below-market interest rates in pursuit of non-economic objectives. This has resulted in low rates of return and a high number of non-performing loans, threatening the future health of the Chinese economy. As a result, reform of capital markets is a high priority of the Chinese government. At the same time, the country is implementing various environmental policies to deal with serious pollution issues. In this paper we ask how reforms of the capital market will affect the functioning of a carbon tax. This allows us to assess how China's willingness to join global efforts to reduce carbon emissions is influenced by China's current efforts to reduce investment subsidies. We compare the costs of a carbon tax in a reformed economy with the costs of a carbon tax in the current subsidized economy. We find that in the subsidized economy the tax-interaction effect dampens the effect of a carbon tax resulting in smaller reductions in emissions than what would result in a reformed economy. Importantly, we also find that the effect on economic welfare from a carbon tax is lower in the subsidized economy; in fact, for lower levels of reductions, the carbon tax is actually welfare improving. These results have important implications for an economy undergoing economic transition. The carbon tax rate required to achieve a certain level of emission reductions will be higher in an economy with capital subsidies. However, the welfare implications of the tax indicate that the current system with capital subsidies is highly distorting implying that there is a high efficiency cost for the non-economic objectives the government is pursuing by maintaining this system of subsidies.     

The repatriation incentive of the foreign dividend exemption system

Due to the high taxation of domestic corporate income, Japanese multinational enterprises have avoided to repatriate foreign profits to Japan for quite some time. As a consequence, the Japanese government introduced a new taxation system in 2009 – the so called dividend exemption system – which was aimed at reducing the effective tax burden of foreign dividends of Japanese multinational companies in order to increase tax revenue and stimulate economic growth. Applying a theoretical framework which allows comparing the repatriation incentive of the old and new Japanese tax systems, we find that in the long-run the tax regime change fails to incentivize foreign subsidiaries to repatriate foreign profits. Especially subsidiaries with high leverage located in countries with low corporate taxes and low dividend taxes might reinvest rather than distribute their earnings in the dividend exemption method.     

Income inequality and economic growth

Despite the extensive existing literature on income inequality and economic growth, there remains considerable disagreement on the effect of inequality on economic growth. Existing literatures find either a positive or a negative relationship. In this paper, we attempt to theoretically examine that relationship with a stochastic optimal growth model. We make the disagreement clear within a single model. We conclude (i) that both are possible – that is, higher inequality can retard growth in the early stage of economic development, and can encourage growth in a near steady state, (ii) that income redistribution by high income tax does not always reduce income inequality. Income inequality can be reduced by higher income tax in a near steady state, but it cannot be reduced in the early stage of economic development, and (iii) that two government polices – rapid economic growth and low income inequality – can be achieved by low income tax in the early stage of economic development, but both cannot be achieved simultaneously in a near steady state.     

征收碳税对中国经济增长与行业发展的影响

征收碳税已成为众多国家推动低碳经济发展的重要措施之一.本文采用1999～2008年中国29个省、直辖市、自治区和部分行业的相关数据,构建面板数据模型,并运用广义最小二乘估计法,对征收碳税与经济增长和行业发展之间的关系进行实证分析,得出以下结论:征收碳税对中国经济增长的影响存在显著的地区差异和行业差异;在较低强度的碳税政策下,碳税对中东部地区大部分省份的经济增长有促进作用,但阻碍中西部地区一些省份的经济增长;征收碳税对我国大多数行业的发展起推动作用,但不利于少数高能耗行业的发展.     

Support to renewable energy sources and carbon capture and sequestration: comparison of alternative green tax reforms

We compare the economic and environmental effects of several specifications of a green tax reform (GTR) where tax revenues are used to support renewable energy sources (RESs) and carbon capture and sequestration (CCS) activities. With this aim, we propose an equilibrium model where final-goods production uses labour and energy, and energy production uses nonpolluting RES and polluting fossil fuels. The comparison is based on three key indicators: output per worker, energy intensity and the ratio of renewables over nonrenewables. We test five variations of the GTR in addition to the no-policy case. Results show that a GTR as the one we propose here never provides a double dividend. There are environmental benefits but at the expense of the economy. Additionally, for lower tax levels, prioritizing RES support has lower economic costs and potential environmental benefits. For higher tax levels, CCS support becomes more competitive.     

碳税政策效应理论研究评述

本文对国外有关碳税政策效应的理论研究进行了系统的回顾和梳理,分析了碳税的环境效应、经济效应、分配效应和福利效应,并比较了碳税与能源税、排污许可证交易制度在碳减排效果和政策成本方面的区别。本文分析表明,中国要实施碳税应充分借鉴国际经验和现有研究成果,并要结合我国经济社会的发展状况,作出进一步的理论分析与实证研究。碳税政策的制定,既要考虑自身的多重效应,又要仔细分析它与其他政策工具之间的相互影响。     

On the impacts of carbon tax and technological progress on China

Using a dynamic national computable general equilibrium model, we investigate the impact of carbon tax and energy efficiency improvement on the economy and environment of China. The Chinese social account matrix is presented based upon the latest input–output table (2012 IO table) and other data. The business as usual (BAU) scenario is designed according to several forecasts about China by 2030, followed by six policy scenarios, including different levels of carbon tax and technological progress as well as their combinations. The results show that carbon tax will frustrate the overall economic growth slightly. The CO₂ emission will be 13.81% lower in 2030 compared to BAU case if the carbon tax scheme is carried out at a rate of 200 RMB/ton of CO₂. Technological progress will stimulate the economic growth, enrich the household and government income, increase total investment and make most sectors prosperous with the exception of energy industries.     

AGE analysis of the impact of a carbon energy tax on the Irish economy

A computable general equilibrium model with specific detail in taxation and energy use is developed in this paper to quantify the impact of the implementation of energy taxation to reduce carbon dioxide emissions in Ireland. Benchmark data combining physical energy and emissions data and economic data in the form of a Social Accounting Matrix (SAM) had to be compiled from various data sources, because energy and pollution accounts from the SEEA are not available for Ireland. We find that the reduction target for energy related CO₂ emissions in Ireland of 25.8% compared to 1998 levels can be achieved with a carbon energy tax of 10-15 euros per tonne of CO₂. Though fuel switching is important in meeting the target, this result is more sensitive to the possibilities for producers to substitute away from energy use. Welfare would fall but only by small percentages. Production and consumption patterns would change more significantly, with a shift in demand from fuels with a high emission factor to energy sources with a lower carbon-intensity and from energy to other commodities. This paper confirms that a carbon energy tax leads to greater emission reductions than an equivalent uniform energy tax. The latter has a stronger negative impact on the less polluting energy sectors whereas the carbon tax greatly stimulates the use of renewable energy and reduces the use of peat and coal. The new SAM, the model and the application to energy taxes contribute to a better informed debate on environmental policy in Ireland.     

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.     

Dividend taxation and intertemporal tax arbitrage

We analyze the effects of changes in dividend tax policy using a life-cycle model of the firm, in which new firms first access equity markets, then grow internally, and finally pay dividends when they have reached steady state. We find that unanticipated permanent changes in tax rates have only small effects on aggregate investment, since macroeconomic dynamics are dominated by mature firms for which dividend taxation is not distortionary. Anticipated or temporary dividend tax changes, on the other hand, create incentives for firms to engage in inter-temporal tax arbitrage so as to reduce investors' tax burden. For example, a temporary tax cut – the type most likely to be enacted by policymakers – induces firms to accelerate dividend payments while tax rates are low, which reduces their cash holdings and makes them capital-constrained when large investment opportunities arise. This can significantly lower aggregate investment for periods after the tax cut.     

Household Transport Demand in a CGE-framework

The main objective of this study is to improve the modelling of household demand for transport services in a Computable General Equilibrium (CGE) model. The new extended model is then used for numerical calculations to test how the Swedish economy reacts to a carbon target. Special attention will be given to distributional effects and the connection between labour supply and work journeys in a sparsely populated country like Sweden. A differentiation between trip purposes and trip length, a complementary relationship between work journeys and labour supply, and a subdivision of households by density of population and income influence the numerical results. Our main conclusions from the analysis of a carbon target are that if the carbon tax revenue is recycled by decreasing the employers’ social contribution fee, welfare costs are lower than with lump-sum replacements of tax revenue to households. The welfare cost may be reduced even further if work journeys are not additionally taxed as compared to the base year. However, the lower total welfare cost is obtained at the expense of making society more unequal, since both labour tax recycling (cuts in employers’ social contributions) and exempting tax on work journeys will make low income groups carry a higher burden. An increased carbon dioxide tax is also shown to increase welfare differences between sparsely populated areas and city regions in Sweden.      

Output‐based rebating of carbon taxes in a neighbour's backyard: Competitiveness,leakage and welfare

We investigate how, in an open economy, carbon taxes combined with output‐based rebating (OBR) perform in interaction with the carbon policies of a large neighbouring trading partner. Analytical results suggest that, whether the purpose of the OBR policy is to compensate firms for carbon tax burdens or to maximize welfare (accounting for global emission reductions), the OBR rate should be positive in policy‐relevant cases. Numerical simulations for Canada, with the US as the neighbouring trading partner, indicate that the impact of US policies on the OBR rate will depend crucially on the purpose of the Canadian OBR policies. If, for a given US carbon policy, Canada's aim is to restore the competitiveness of domestic emission‐intensive and trade‐exposed (EITE) firms to the same level as before the introduction of its own carbon taxation, we find that the necessary domestic OBR rates will be insensitive to the foreign carbon policies. However, if not only the Canadian carbon tax but also an equally high US tax is introduced, compensatory Canadian OBR rates will be up to 50% lower, depending on the sector and on US OBR policy. If the policy objective is to increase economy‐wide allocative efficiency (welfare) of Canadian policies by accounting for carbon leakage, the US policies will have only a minor downward pressure on desirable OBR rates in Canada. Practical choices of OBR rates hardly affect overall domestic economic performance; thus, output‐based rebating qualifies as an instrument for compensating EITE industries without a large sacrifice in terms of economy‐wide allocative efficiency.     

Redealing the cards: How an eco-industry modifies the political economy of environmental taxes

This article presents a combined economic–political model of environmental taxation setting. The model introduces a third lobby group – the lobby of an eco-industry – in addition to the traditional lobbies of polluting firms and environmentalists. Pressure groups interact to influence the environmental tax chosen by a regulator maximizing its chances of being reelected. The eco-industry lobby adds a new political contribution toward a higher environmental tax. The imperfectly competitive structure of the eco-industry also modifies the incentives of the usual lobbies. When the foreign environmental policy is constant, environmentalists can be in favor of a decrease in the local tax in order to reduce foreign pollution. We also discuss the formation of alliances between the eco-industry and one of the other lobbies and their potential impact. In general, the impact of lobbying activities on the politically optimal tax is ambiguous and depends on the relative concentration of each pressure group.     

Profit-maximizing R&D in response to a random carbon tax

This paper determines a firm’s profit-maximizing R&D response to an uncertain carbon tax, for two different R&D programs: cost reduction of low carbon energy technologies and emissions reductions of currently economic technologies. We find that optimal R&D does not increase monotonically in a carbon tax. R&D into alternative technologies increases only if the firm is flexible enough; R&D into conventional technologies first increases then decreases in a carbon tax. Firms that are very flexible may increase R&D into alternative technologies when the uncertainty surrounding a carbon tax is increased; otherwise firms will generally decrease R&D investment in uncertainty.     

FDI,taxes and agglomeration economies in the EU15

This article provides an empirical analysis of the impact of tax differentials and agglomeration economies on Foreign Direct Investment (FDI). The article departs from most previous work on FDI and tax competition in a number of ways. First, it incorporates several measures of agglomeration in order to investigate whether agglomeration economies mitigate the downward spiral in tax rates. As the strength of agglomeration economies may vary with the degree of integration, we use a panel of bilateral FDI flows for a highly integrated region including countries with similar economic structure – the EU15 – from 1986 to 2004. Second, the empirical analysis explicitly deals with the problem of selection bias by using the Heckman sample selection approach. Also, by focusing on the EU15, we are able to provide additional information on the determinants of FDI between similar, higher-income countries. The empirical analysis provides some evidence of corporate marginal effective tax rates having an impact on FDI. This result, however, is sensitive to the inclusion of agglomeration economies. In particular, we find both Marshall types of technological externalities and overall concentration of economic activity to have an influence on FDI flows and, moreover, mitigating the negative impact of taxes.     

TAX-PRICE REFORM WITH DIRECTLY UNPRODUCTIVE PROFIT-SEEKING (DUP) ACTIVITIES*

This paper explores the extent to which insights available from existing writings on directly unproductive profit-seeking (DUP) activities in international trade modify rules of tax and tariff reform in normative public economics and examines in what way these should affect advice on tax policy usually given to developing countries. The analysis proceeds by developing two models. The first incorporates revenue seeking directly into a standard open economy public finance model and examines whether analysis of policy reform and economic costs of distortionary tariffs must be modified. The second includes a political component in the form of lobbying for subsidies – the expenditure side of the budget – as well as a normative economic component that raises taxes – the revenue side – to finance the social costs of such lobbying. The model can be used to determine the effects of politically determined expenditures on tax setting. The analysis shows that the grammar of welfare-theoretic arguments that underlies the reform and design of tax and tariff structures is robust to the inclusion of DUP activities of the type considered here. In particular, the latter lend no presumption in favor of uniformity in tax and tariff structures. It is argued that existing policy advice on tax and tariff reform derived from models where DUP activities have traditionally played no role continues to be appropriate when account is taken of formal treatments of DUP-type phenomena extant in the current literature.     

When does a carbon tax on fossil fuels stimulate biofuels?

A carbon tax is an efficient economic instrument to reduce emissions of carbon dioxide released from fossil fuel burning. If designed properly, it could also help significantly to promote renewable energy. Using a multi-sector, multi-country computable general equilibrium model this study investigates under what circumstances a carbon tax would help stimulate penetration of biofuels into the energy supply mix for road transportation in various countries and regions around the world. This study shows that a carbon tax cum biofuel subsidy policy, where a carbon tax is introduced to fossil fuels and part of the tax revenue is used to finance the biofuel subsidy, would significantly help stimulate market penetration of biofuels. On the other hand, a carbon tax alone policy, where the entire tax revenue is recycled to households through a lump-sum transfer, does not help stimulate biofuels significantly even at higher tax rates. Although the carbon tax cum subsidy policy would cause higher loss in economic output at the global level as compared to the carbon tax alone policy, the incremental loss is relatively small. The key policy insight drawn from the study is that if a carbon tax were to be implemented in an economy for the purpose of climate change mitigation, recycling part of its revenue to finance biofuel subsidies would significantly help stimulate biofuels.     

Tax structure and economic growth

Past theoretical work predicts that higher corporate tax rates should decrease economic growth rates, while the effects of high personal tax rates are less clear. In this paper, we explore how tax policies in fact affect a country's growth rate, using cross-country data during 1970–1997. We find that statutory corporate tax rates are significantly negatively correlated with cross-sectional differences in average economic growth rates, controlling for various other determinants of economic growth, and other standard tax variables. In fixed-effect regressions, we again find that increases in corporate tax rates lead to lower future growth rates within countries. The coefficient estimates suggest that a cut in the corporate tax rate by 10 percentage points will raise the annual growth rate by one to two percentage points.