Should the Carbon Price Be the Same in All Countries?

International differences in fuel taxation are huge, and may be justified by different local negative externalities that taxes must correct, as well as by different preferences for public spending. In this context, should a worldwide uniform carbon tax be added to these local taxes to correct the global warming externality? We address this question in a second best framework à la Ramsey, where public goods have to be financed through distortionary taxation and the cost of public funds has to be weighted against the utility of public goods. We show that when lump‐sum transfers between countries are allowed for, the second best tax on the polluting good may be decomposed into three parts: one, country‐specific, dealing with the local negative externality, a second one, country‐specific, dealing with the cost of levying public funds, and a third one, global, dealing with the global externality and which can be interpreted as the carbon price. Our main contribution is to show that the uniformity of the carbon price should still hold in this second best framework. Nevertheless, if lump‐sum transfers between governments are impossible to implement, international differentiation of the carbon price is the only way to take care of equity concerns.     

Revenue Recycling and the Welfare Effects of Road Pricing

This paper explores the interactions between taxes on work-related traffic congestion and pre-existing distortionary taxes in the labor market. A congestion tax raises the overall costs of commuting to work and discourages labor force participation. The resulting welfare loss in the labor market can easily exceed the Pigouvian welfare gain from internalizing the congestion externality. However, if congestion tax revenues are used to reduce labor taxes, the net impact on labor supply is positive, and this can raise the overall welfare gain from the congestion tax by around 100 percent. Nonetheless the optimal congestion tax still equals the Pigouvian tax.
JEL classification R 41; H 21; H 23     

Tax competition and tax structure in open federal economies: Evidence from OECD countries with implications for the European Union

Tax competition arguments suggest that governments that operate in an open economy (such as local governments) should not and will not rely on non-benefit taxes, such as the income tax. Yet we observe reliance on income taxes by local governments in many countries, and such reliance changes over time. Evidence from a panel data set of 13 OECD countries over the period 1975-1984 suggests that competition between levels of government (resulting in a vertical fiscal externality) and between governments at the same level (resulting in a horizontal fiscal externality) provide some economic rationale for these changes. Moreover, the evidence indicates that the vertical and horizontal fiscal externalities interact. These results have some interesting implications for fiscal policy in the European Union, particularly as the EU continues to evolve. One implication for the EU is that enlargement that increases tax base disparities within the EU (and is not accompanied by an EU-level income tax) will tend to lower national income tax rates, although this must be qualified because it also depends on the mobility of the population. A second implication is that fiscal expansion of the EU to include an EU-level income tax may tend to lower the reliance of national governments on income taxes through the vertical externality, but may also tend to equalize tax bases across countries, and so increase reliance on national income taxes through the horizontal externality.     

Optimal unemployment insurance and redistribution

We characterize optimal income taxation and unemployment insurance in a search‐matching framework where both voluntary and involuntary unemployment are endogenous and Nash bargaining determines wages. Individuals decide whether to participate as job seekers and if so, how much search effort to exert. Unemployment insurance trades off insurance versus search and participation incentives. We also allow for different productivity types so there is a redistributive role for the income tax and show that a piecewise linear wage tax internalizes the macro effects arising from endogenous wages. Type‐specific lump‐sum taxes and transfers can then redistribute between individuals of differing skills and employment states. Our analysis embeds optimal unemployment insurance into an extensive‐margin optimal redistribution framework where transfers to the involuntarily and voluntarily unemployed can differ, and nests several standard models in the literature.     

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.     

Optimal Tax and Public Investment Rules for Congestion Type of Externalities

Optimal government policy is considered in a second-best framework where consumers and producers cause an externality of the congestion type and income distribution issues are taken into account. The theoretical results of the optimal tax literature are adapted using the concept of the net social Pigouvian tax. An illustrative AGE model uncovers the relative importance of its components. The model demonstrates that the level of the externality tax does not depend strongly on distribution concerns, as reoptimization of the other taxes ensures that the income distribution objective is reached. The model also allows us to study the interaction between externality taxes and public abatement.     

Choice and design of regulatory instruments in the presence of green consumers

Using a vertically differentiated product model, this paper examines welfare implications of various government policies in a situation where consumers are environmentally discerning. It studies ad valorem taxes/subsidies and emission taxes. The optimal policy depends on the magnitude of damage parameter associated with environmental externality. For a given distribution of tastes and preferences, as the damage parameter increases from a low to a high value, the optimal policy shifts from an ad valorem tax to an ad valorem subsidy. It also shows that for a sufficiently low damage parameter, an ad valorem tax dominates an emission tax.     

Trade,environment, and income inequality: An optimal taxation approach

In a small open economy, how should a government pursuing both environmental and redistributive objectives design domestic taxes when redistribution is costly? And how does trade liberalization affect the economy's levels of pollution and inequalities, when taxes are optimally and endogenously adjusted? Using a general equilibrium model under asymmetric information with two goods, two factors (skilled and unskilled labor), and pollution, this paper characterizes the optimal mixed tax system (nonlinear income tax and linear commodity and production taxes/subsidies) with both production and consumption externalities. While optimal income taxes are not directly affected by environmental externalities, conditions are derived under which under‐ or over‐internalization of social marginal damage is optimal for redistributive considerations. Assuming that redistribution operates in favor of the unskilled workers and that the dirty sector is intensive in unskilled labor, simulations suggest that trade liberalization involves a clear trade‐off between the reduction of inequalities and the control of pollution when the source of externality is only production; this is not necessarily true with a consumption externality. Finally, an increase in the willingness to redistribute income toward the unskilled results paradoxically in less pollution and more income inequalities.     

“More is less”: the tax effects of ignoring flow externalities

Using a model of non-linear, non-monotone decay of the stock pollutant, and starting from the same initial conditions, the paper shows that an optimal tax that corrects for both stock and flow externalities may result in a lower tax, fewer cumulative emissions (less decay in emissions) and higher output at the steady state than a corrective tax that ignores the flow externality. This “more is less” result emphasizes that setting a corrective tax that ignores the flow externality, or imposing a corrective tax at too low a level where there exists only a stock externality, may affect both transitory and steady-state output, tax payments and cumulative emissions. The result has important policy implications for decision makers setting optimal corrective taxes and targeted emission limits whenever stock externalities exist.     

Keeping up with the Joneses, consumer ethnocentrism, and optimal taxation

This paper sets up a two-good (domestically- and internationally-produced goods) model of a small open economy with consumption externalities and uses it to examine the optimal taxation. Since keeping up with the Joneses leads an individual consumption's to impose a negative externality on the consumption of others, a consumption tax and tariff are thereby socially desirable to correct this distortion. Due to the fact that the government has to account for additional distortion caused by consumer ethnocentrism and that keeping up with the Joneses in the consumption of domestic goods tends to reinforce the influence of ethnocentrism on the purchase of domestic products, the consumption of imported goods is subject to a higher tariff rate because of the cross-market externality. Of interest, if consumption only involves an own-market externality, there is no cyclical consequence for the optimal taxes. However, if consumption involves both own- and cross-market externalities, the optimal tariff is state-contingent and, more specifically, is countercyclical.     

Strategic Environmental Policies when Waste Products are Tradable

The paper deals with international trade in hazardous waste products when there is an international oligopoly market for waste, and both waste‐importing and waste‐exporting countries act strategically to utilize national environmental policies to attach rents arising from trade in waste. The authors model a multiple‐stage game where waste is generated in an industrialized country as a byproduct of production, and potentially is exported to some less‐developed countries, if not abated locally, or imposed on local residents at a cost of an environmental tax. In the market for waste, an oligopolistic supply is assumed. The demand for waste is perfectly competitive, with waste‐processing firms guided by marginal disposal costs and environmental taxes levied by foreign countries. With each country playing Nash, the analysis finds domestic and foreign taxes to be distorted from the Pigouvian taxes in such a way that the domestic (waste‐exporter) tax rate is set below, and the foreign tax rate is set above, the Pigouvian taxes. However, a global welfare optimum requires tax distortions in the opposite direction, in the sense that foreign environmental taxes must be set below the Pigouvian tax rate.     

Tax avoidance and intra-family transfers

We study how taxes on intra-family transfers (bequests and gifts) affect parents' transfers to their children. Our focus is on the incentives for tax avoidance. These issues are important for families and their welfare, as well as for governments and their possibilities of raising revenue from transfer taxes. Using a theoretical model, we show how altruistic parents avoid taxes by changing the timing of transfers when inter vivos gifts are taxed separately from bequests (which is the case in many developed countries). The excess burden per tax dollar of the transfer taxes is sometimes infinitely large because of tax avoidance. All tax avoidance is eliminated if bequests and gifts from the same donor are jointly taxed.     

Sustainable Forestry: Timber Bequests, Future Generations and Optimal Tax Policy

This paper analyzes harvesting and timber bequest behavior in a two-period overlapping generations model where the government uses site productivity, yield and inheritance taxation. The ceteris paribus effects of forest and inheritance taxes are derived first, then the paper discusses the optimal design of forest and inheritance taxes by assuming that intergenerational externalities are either absent or operative. In the absence of intergenerational externalities, it is optimal to use only the site productivity tax, and not to introduce yield and inheritance taxes at all. In the presence of intergenerational externalities the situation changes. The paper demonstrates that the externality can be internalized by introducing either a yield tax or an inheritance subsidy, or both. If the government is able to use both at the same time, it is desirable to use the yield tax to 'punish' excessive harvesting and an inheritance subsidy to 'bribe' to give bequests.     

地方税收效率及公平性实证研究

在现行经济及税收制度下,增值税和行为税收入比重提升会提高资本要素的产出效率;营业税和企业所得税比重的增加在提高资本要素产出效率的同时,却会降低劳动要素的产出效率;个人所得税和财产税比重提高有助于提升劳动要素的产出效率,而后者同时会降低资本产出效率;资源税类收入比重提高将会降低资本要素产出效率;流转税、所得税、行为税和财产税占税收收入比重的增加都会引起经济的总体产出的减少;我国地方税收收入具有显著的公平效应,其中所得税和财产税的公平效应相对更强,资源税及增值税也具有明显的公平收入分配的作用。     

Choosing between gifts and bequests: How taxes affect the timing of wealth transfers

A number of theories have been advanced to explain the size and timing of intergenerational transfers. One factor only recently explored is the effects of taxes, and in particular the estate tax, on such transfers. This paper represents the first attempt to explore how capital gains and gift taxes, in addition to the estate tax, interact to influence incentives in the timing of transfers. Using estate tax data and exploiting variations in state inheritance, gift, and capital gains tax rates, this paper finds taxes to be an important consideration in the choice between gifts and bequests. In particular, each of capital gains and gift taxes are found to be important determinants of the timing of transfers. These findings are robust to a number of specifications that control for borrowing, charitable bequests, marital status, and the portfolio composition of wealth transfers.     

Tax contracts and elections

In this paper we examine the impact of tax contracts as a novel institution on elections, policies, and welfare. We consider a political game in which three parties compete to form the government and voters may behave strategically. Parties have policy preferences about the level of public-good provision and benefit from perks when in office. A government raises taxes for both purposes. We show that tax contracts yield moderate policies and lead to lower perks by avoiding the formation of grand coalitions in order to win government. Moreover, in polarized societies they unambiguously improve the welfare of the median voter.     

Optimal Tax Policy under Environmental Quality Competition

This paper studies the socially optimal emission and commodity tax policy when consumers are willing to pay a price-premium for environmentally friendlier variants of a commodity vertically differentiated in environmental quality. The first-best levels of quality can be obtained by a combination of a uniform ad valorem tax and an emission tax (or a subsidy for buying green products). The first-best emission tax is higher than the social valuation of the positive externality associated with average environmental quality. Regardless of environmentally conscious consumers, if only one instrument is available, the second-best emission tax is equal to the social valuation of the positive externality associated with average environmental quality. A uniform ad valorem tax increases welfare only if the social valuation of the positive externality associated with average environmental quality is low enough.     

DYNAMIC ENVIRONMENTAL TAXES UNDER INTERNATIONAL DUOPOLY

This paper studies a dynamic game of environmental taxes between two countries in the absence of explicit trade policies when both governments and firms act strategically. We demonstrate that the environmental tax in the steady‐state equilibrium in a dynamic environmental tax game is lower than that in a static environmental one. Therefore, the dynamic behaviour of the governments results in an increase in the environmental damage. Further, as a result of international cooperation on environmental taxes between two countries in the beginning of policy competition, there is an increase in the optimal environmental tax. This implies that it is important to set cooperative environmental taxes in the beginning of policy competition because non‐cooperative environmental taxes in the dynamic game result in the race‐to‐the‐bottom, which does not lead to environmental improvement.     

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.     

Vertical versus horizontal tax externalities: An empirical test

We study taxation externalities in federations of benevolent governments. Where different hierarchical government levels tax the same base, one can observe two types of externalities: a horizontal externality, working among governments of the same level and leading to tax rates that are too low compared to the social optimum; and a vertical externality, working between different levels of government and leading to suboptimally high tax rates. Building on the model of Keen and Kotsogiannis [Keen, Michael J., Kotsogiannis, Christos, 2002. Does federalism lead to excessively high taxes? American Economic Review 92 (1) 363–370], we derive a discriminating hypothesis to distinguish vertical and horizontal tax externalities based on measurable variables. This test is applied to a panel data set on local taxes in a sample of Swiss municipalities that feature direct-democratic fiscal decision making, so as to maximize the correspondence with the “benevolent” governments of the theory. We find that vertical externalities dominate – they are thus an observed empirical phenomenon as well as a notable extension to the theory of tax competition.