The effectiveness of gasoline taxation to manage air pollution

Higher gasoline taxes can be justified because cars cause significant local, regional, and global air pollution damages. This study examines whether charging higher taxes would result in significant emission reductions. Both experimental survey data and actual behavior in Southern California and Connecticut are evaluated to explore whether people would change their driving behavior in response to higher gasoline prices. Both sets of results reveal that drivers are price inelastic in the short run (−0.4 to −0.6) and long run (−0.5 to −0.7). Imposing environmental surcharges on gasoline will result in only a small reduction in driving and thus only a small improvement in the environment. Such taxes will place a heavy and clear burden on drivers, however, making gasoline taxes extremely unpopular. Finally, the study finds that the income elasticity of gasoline is low (0.1–0.2) so that the gas tax will fall heavily on the poor.     

Congestion with heterogeneous commuters

We study a congestion model where a continuum of heterogeneous commuters make a binary choice between riding a bus and driving private vehicles for their commutes. Formulating the model as a large game, we establish the existence and uniqueness of a nontrivial Nash equilibrium and analyze how a gasoline tax affects the allocation of commuters between public transportation and private vehicles at the equilibrium. Based on the analysis, we provide a sufficient condition under which a gasoline tax is Pareto improving. We also prove the existence of a socially optimal policy that minimizes the aggregate loss to all commuters.     

Optimal taxation of car ownership, car use and public transport: Insights derived from a discrete choice numerical optimization model

We formulated and numerically evaluated a model of car ownership, car use and public transport use for peak and off-peak hours of the day. The model was used to study the optimal tax structure for passenger transport in Belgium, with special emphasis on the optimal tax treatment of diesel versus gasoline cars. We obtained a number of interesting results. First, if the government can set all fixed and variable transport taxes optimally, the higher marginal external cost of diesel use implies that the optimal tax per kilometre for the use of a diesel car is higher than for the use of a gasoline car. Moreover, high congestion implies that the taxes on car use in the peak period are more than twice their current levels. However, the optimal tax on ownership of a diesel car is some 200€ below its current level. Second, if the government uses kilometre taxes that do not differentiate between fuel types, the optimal ownership tax on a diesel car is twice as high as the tax on a gasoline car. Furthermore, if political constraints restrict user taxes to their current levels, we find that optimal ownership taxes on diesel cars double, whereas those on gasoline cars rise by 30%. Finally, subsidies to public transport are found to be optimal as long as variable car taxes are not differentiated between periods.     

Endogenous trade policy in general equilibrium: An interaction of redistribution rule,trade openness,and labor market condition

Using a general equilibrium framework, the paper derives trade policy endogenously for a small country. It shows that, contrary to the existing literature, a lobbying industry is not guaranteed trade protection; it may even face trade taxes. Besides lobbying, trade policy depends on other factors such as the trade revenue distribution rule, income distribution across groups, trade openness, factor substitutability in production, industry employment size, and labor market flexibility. The paper also shows that the observed phenomenon of government preference for import tariffs over export subsidies—a long overdue puzzle—is an inherent outcome of lobbying equilibrium. It also shows that trade policies such as import tariffs and export taxes that have the same impact on economic market—Lerner symmetry (1936)—are driven by the same forces in the political market.     

Macroeconomic impacts of fiscal policy shocks in the UK: A DSGE analysis

This paper develops and estimates a new-Keynesian dynamic stochastic general equilibrium (DSGE) model for the analysis of fiscal policy in the UK. We find that government consumption and investment yield the highest GDP multipliers in the short-run, whereas capital income tax and public investment have dominating effect on GDP in the long-run. When nominal interest rate is at the zero lower bound, consumption taxes and public consumption and investment are found to be the most effective fiscal instruments throughout the analysed horizon, and capital and labour income taxes are established to be the least effective. The paper also shows that the effectiveness of fiscal policy decreases in a small open-economy scenario and that nominal rigidities improve effectiveness of public spending and consumption taxes, whereas decrease that of income taxes.     

A dynamic general equilibrium model of driving,gasoline use and vehicle fuel efficiency

The paper constructs a dynamic general equilibrium model to study the endogenous determination of gasoline use, driving and vehicle fuel efficiency. Before vehicles are produced, their fuel efficiency can be chosen optimally. Once produced, their fuel efficiency cannot be changed. The model generates endogenously different short-run and long-run price elasticities of gasoline use, with their magnitudes well within the region of plausible estimates in the empirical literature. The paper shows that although raising gasoline taxes and tightening the CAFE standard both reduce gasoline use in the long run, they are different in terms of the transmission mechanism, magnitudes of responses and dynamic paths of key endogenous variables.     

Fiscal Policy and Long-run Growth in R&D-based Models with Endogenous Market Structure

This paper shows that in a model of endogenous growth that does not exhibit the scale effect, taxes on consumption and labor income and the level and composition of public expenditure have no effect on steady-state growth. The only fiscal instruments that affect steady-state growth are taxes on asset and corporate income. In line with standard intuition, tax rates and public expenditure have level effects on income per capita. These results emphasize that although growth is endogenous, in the sense that it is determined by the model and it is subject to policy action, instruments that work by changing market size do not affect it. Effective growth-enhancing policies operate through the interest rate.     

Pollution and the value of time

Some activities that cause pollution are undertaken by the consumers because they save time satisfying their needs that way instead of using similar but more time-consuming activities. Thus private transportation is used instead of public, one-way bottles are purchased instead of returnable, etc.Modern demand theory assigns a value (or rather opportunity cost) of time that is often related to the wage rate. This is used here and it has the consequence that the income distribution can be used to analyze the effect of various policy measures directed to reduce pollution. It is also shown how policy can be directed to influence time. The Kuhn-Tucker conditions are used to separate the customers into those that, depending upon income, buy e.g. one-way bottles and those that buy returnable ones.To illustrate the procedure some explicit examples of the effects of varying policy parameters such as taxes are shown.     

Second-Best Pollution Taxes: an Analytical Framework and Some New Results

This paper compares the second-best optimal tax on polluting consumption goods with the Pigovian tax, which would internalize marginal environmental damage at a second-best optimum. It is shown that the relationship between the optimal tax on polluting consumption and the Pigovian tax is determined by the substitutability between labour and polluting consumption or clean and polluting consumption, depending on whether a wage tax system or a commodity tax system is being considered. The key factor determining the relationship between the two taxes is gross substitutability between the two taxed goods. As long as there is gross substitutability, the optimal dirt tax exceeds the Pigovian tax. The opposite can occur if and only if the two goods are gross complements.     

Gas prices,beer taxes and GDL programmes: effects on auto fatalities among young adults in the US

Efforts to reduce teenage driving fatalities can be categorized as: enhancing driving skills, constraining driving behaviour and limiting the exposure of young drivers to the road. This article uses state-year specific Fatality Analysis Reporting System (FARS) data on the motor vehicle fatalities of young adults aged 15–24 to estimate the effects of gasoline prices, beer taxes and the enactment of Graduated Drivers License (GDL) programmes over the 1985–2006 period. Results indicate that a 10% increase in gasoline prices reduce fatalities by 3.2–6.2%. The largest percentage reductions occurred among 15- to 17-year-old drivers. 10% higher beer taxes were estimated to reduce motor vehicle fatalities among young drivers by approximately 1.3%. In this case, there was virtually no effect on 15- to 17-year-old drivers. Finally, the introduction of more restrictive GDL programmes, those with a 6-month learner's permit phase and subsequent limits on early nighttime driving or on the number of passengers, reduced fatalities among 15- to 17-year-old drivers by 24%. The effects on 18- to 21-year-old drivers were smaller and the weakest GDL programmes had no effect on fatalities.     

Seigniorage and public good in an OLG model with cash-in-advance constraints

This paper is a contribution to the theory of the optimal monetary policy in overlapping generations models with a cash-in-advance constraint applying on old age consumption purchases. We are particularly interested in the study of seigniorage when the latter is used to finance public goods valued by consumers. Assuming that a public good enters the utility function and the existence of cash-in-advance constraints, we find a Laffer curve of seigniorage at steady-state. We also analyze the dynamic optimal monetary policy when the government maximizes an intertemporal social welfare function and can only resort to seigniorage to finance the purchases of the public good. We show that the optimal rate of money growth may be strictly higher than the one which maximizes steady-state seigniorage: the optimal amount of seigniorage may lie on the decreasing part of the Laffer curve of seigniorage. We finally suppose that the government can use lump-sum taxes in addition to seigniorage. Then, the Friedman rule prevails and public expenditures are only financed through lump-sum taxes.     

Local Transportation Policy and the Environment

The paper introduces a simple framework for analyzing the environmental effects of local transportation policies, and it reviews some evidence. In several cases, subsidies for local public transportation have led to substantial reductions in road transportation and have thereby reduced externalities. Some but not all estimates suggest positive overall welfare effects of such policies. In the rare cases where road pricing has been applied, it has helped to reduce automobile transportation, and it has led to environmental improvements. The experience with specific driving restrictions like “days without cars” and “low emission zones” has been mixed. Local transportation policy can have a useful role to play as a complement to national policy instruments, but neither efficiency nor effectiveness can be taken for granted.     

The effect of inflation uncertainty on ‘crowding out’

It is widely recognized that expansionary fiscal policy can crowd out private investment. The degree of crowding out depends in part on the degree of substitutability between public and private securities. In this paper, we look at how inflation uncertainty affects this substitutability and the degree of crowding out. Depending on the covariance of the return of private securities with the rate of inflation, the degree of substitutability, and thus the level of crowding out, will diminish as inflation uncertainty increases. Indeed, an increase in government debt may actually decrease the real return required on private securities, leading to “negative” crowding out.     

Optimal fiscal policy in a model with inherited aspirations and habit formation

In this paper, we analyze optimal fiscal policies in an overlapping generations framework, where preferences exhibit aspirations in consumption and environmental quality as well as habit formation. We focus on the second best policies when the government needs to finance a given stream of public expenditures by using distortionary taxes. We derive necessary and sufficient conditions under which the competitive equilibrium is characterized by levels of capital and environmental quality that are too small and a level of labor supply that is too large. Our numerical simulations show that an optimal fiscal policy can be used as an effective stabilization device and that when consumption taxes are fixed, the planner implements maintenance investment and capital income subsidies while financing public spending through labor and fixed consumption taxes.     

Foreign direct investment in a world of multiple taxes

Governments impose multiple taxes on foreign investors, though studies of the effect of tax policy on the location of foreign direct investment (FDI) focus almost exclusively on corporate income taxes. This paper examines the impact of indirect (non-income) taxes on FDI by American multinational firms, using affiliate-level data that permit the introduction of controls for parent companies and affiliate industries. Indirect tax burdens significantly exceed the foreign income tax obligations of foreign affiliates of American companies. Estimates imply that 10% higher local indirect tax rates are associated with 7.1% lower affiliate assets, which is similar to the effect of 10% higher income tax rates. Affiliate output falls by 2.9% as indirect taxes rise by 10%, while higher income taxes have more modest output effects. High corporate income tax rates depress capital/labor ratios and profit rates of foreign affiliates, whereas high indirect tax rates do not. These patterns reveal the impact of indirect taxes and suggest the mechanisms by which direct and indirect taxes affect FDI.     

Taxation and employment in general equilibrium: A two-sector analysis

The literature on public finance has so far completely ignored the question of unemployment. In this paper, the traditional two sector model of tax incidence is utilized to develop a model in which the effect of various taxes can be analyzed and compared. On the basis of this model, we have compared and studied the effect on employment of various equal-yield and equal-rate taxes. Also, on the basis of reasonable empirical assumptions certain policy conclusions are stated.     

Horizontal and vertical indirect tax competition: Theory and some evidence from the USA

This paper provides a simple but general theoretical framework for analyzing simultaneous vertical and horizontal competition in excise taxes, which includes several previous contributions as special cases. It allows for both elastic individual demand for the taxed good, and cross-border shopping (and smuggling). It then estimates equations informed by the theory on a panel of US state and federal excise taxes on cigarettes and gasoline. The results are generally consistent with the theory, when the characteristics of the markets for the goods are taken into account. Taxes in neighboring states have a significant and large effect in the case of cigarettes. The possibility of smuggling cigarettes from low tax states also plays a role. In the case of gasoline, taxes in neighboring states do not play a significant role; however, there is evidence in this case of vertical competition.     

Revenue‐enhancing Trade Liberalization in a Differentiated Duopoly

Existing studies suggest that in developing countries, tax reforms that increase consumption taxes can compensate for shortfalls in revenue from a tariff reduction. However, these revenue‐enhancing tariff–tax reforms have a critical shortcoming—they generally reduce welfare under imperfect competition. This paper shows that tax reforms such as consumption tax reforms do not necessarily have to be implemented to make up for revenue shortfalls from tariff reductions under imperfect competition, because trade liberalization through tariff cuts leads to an increase in government revenue when domestic and imported goods have a high substitutability. This revenue‐enhancing effect of a tariff reduction occurs for a wider degree of product substitutability when initial tariff and consumption tax rates are high. More importantly, we show that even if initial tariff and consumption tax rates are sufficiently low, a tariff reduction still increases government revenue for a low degree of product differentiation under Bertrand competition.     

Measuring the social value of local public goods: an empirical analysis within Paris metropolitan area

A non-linear hedonic model is used to estimate the implicit marginal prices of 17 local public goods in a Paris suburban area on an original data set of some 8200 housing units. The results reveal a robust effect of local public school quality (measured both by the fraction of junior high school students that are at least two years behind grade level and the student/teacher ratio) on house prices. It is observed that housing owners’ marginal willingness to pay for reducing commuting time is roughly similar for public transportation than for car transportation. Another noticeable result is the complete capitalization of local taxes at a discount rate of 3.5%. An illustration of the potential usefulness of the results for Cost–Benefit analysis is also provided.     

The effects of environmental taxes and quotas on the optimal timing of emission reductions under Choquet–Brownian uncertainty

The effects of two environmental policy options for the reduction of pollution emissions, i.e. taxes and non-tradable quotas, are analyzed. In contrast to the prior literature this work endogenously takes into account the level of emissions before and after the adoption of the new environmental policy. The level of emissions is determined by solving the firm's profit maximization problem under taxes and fixed quotas. We find that the optimal adoption threshold under taxes is always larger than the adoption threshold under fixed quota, even in a setting characterized by ecological uncertainty and ambiguity – in the form of Choquet–Brownian motions – on future costs and benefits over adopting environmental policies.