Property taxation as incentive for cost control: Empirical evidence for utility services in Norway

Recent theoretical research suggests that property taxation has incentive effects that can help control cost problems in the public sector. The institutional setting in Norway allows this first empirical investigation of the incentive effect of property taxation, since we can separate between local governments with and without property tax. The raw data of the variation in the unit cost level for utilities show that local governments with property tax have 20% lower unit cost. Using both linear regression and propensity score matching, we are not able to wash out the difference in unit costs. Our interpretation is that having a visible and controversial local tax related to property stimulates voter interest in local government activities and thereby may help cost control.     

Greenhouse Gas Abatement Cost Curves of the Residential Heating Market: A Microeconomic Approach

In this paper, we develop a microeconomic approach to deduce greenhouse gas abatement cost curves of the residential heating sector. Our research is based on a system dynamics microsimulation of private households’ investment decisions for heating systems to the year 2030. By accounting for household-specific characteristics, we investigate the welfare costs of different abatement policies in terms of the compensating variation and the excess burden. We investigate two policies: (i) a carbon tax and (ii) subsidies on heating system investments. We deduce abatement cost curves for both policies by simulating welfare costs and greenhouse gas emissions to the year 2030. We find that (i) welfare-based abatement costs are generally higher than pure technical equipment costs; (ii) given utility maximizing households a carbon tax is the most welfare-efficient policy and; (iii) if households are not utility maximizing, a subsidy on investments may have lower marginal greenhouse gas abatement costs than a carbon tax.     

Cutting costs of catching carbon—Intertemporal effects under imperfect climate policy

We use a two-period model to investigate intertemporal effects of cost reductions in climate change mitigation technologies for the power sector. The effect of cost reductions for CCS depends on how carbon taxes are set. If there is no carbon tax in period 1, but an optimally set carbon tax in period 2, a CCS cost reduction may reduce early emissions. Such an innovation may therefore be more desirable than comparable cost cuts related to renewable energy. The finding rests on the incentives fossil fuel owners face. If future profitability is reduced, they speed up extraction (the ‘green paradox’), and vice versa.     

Informality,innovation, and aggregate productivity growth

This paper investigates how the costs of innovation in the formal sector temper or magnify the impacts of traditional policy levers such as taxation on sectoral choice. I embed a decision whether to operate formally or informally into a richer, general equilibrium model. Formal firms are subject to taxation, but they can improve their productivity through process innovation. Informal firms can potentially avoid taxation, and their productivity is determined by productivity growth in the formal sector. I find that changing tax rates from 50% to 60% decreases formal‐sector participation by 20.9%; however, this percentage falls by 10% when the cost of innovation is lower in the formal sector. The model also illustrates how changes in tax policy affect total factor productivity growth by limiting both the number of formal‐sector firms and the intensity of innovation. These results indicate a potential mechanism to induce firms to operate formally or mitigate harmful impacts of necessary tax changes.     

Costly Tax Enforcement and Financial Repression

Using an overlapping generations production‐economy model characterized by financial repression, purposeful government expenditures and cost of tax collection, we analyse whether financial repression can be explained by the cost of raising taxes. We show that with public expenditures affecting utility of the agents, modest costs of tax collection tend to result in financial repression being pursued as an optimal policy by the consolidated government. However, when public expenditures are purposeless, the above result only holds for relatively higher costs of tax collection. But, more importantly, costs of tax collection cannot produce a monotonic increase in the reserve requirements. What are critical, in this regard, are the weights the consumer assigns to the public good in the utility function and the size of the government.     

A general equilibrium model of the incidence of corporation income tax under uncertainty

In this paper we investigate the incidence of the corporation income tax in terms of a two-sector, general equilibrium model, where production decisions are made under uncertainty. The conventional result, derived originally by Harberger (1962), is that if the corporate sector is the capital-intensive sector, then capital must bear a greater burden of the tax, in proportion to its initial share in national income, than labor. This result continues to hold unambiguously under uncertainty only if the relative and the absolute risk aversion of the corporations are non- increasing in profits. Otherwise, the Harberger result may not hold.     

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.     

Nonlinear Pricing, Redistribution, and Optimal Tax Policy

This paper examines the role of nonlinear pricing by public (or regulated) utilities as a redistributive mechanism in presence of an optimal nonlinear income tax. It models an economy with many types of persons who differ in two unobservable characteristics (earning abilities and tastes). We show that nonlinear pricing does have a redistributive role; it is not a substitute for an ill-designed tax policy. We prove, assuming separable preferences, that a person whose valuation of the public sector output is smaller than the average valuation of the population (all measured at the same consumption bundle) must face a marginal price for the good above its marginal cost. Further assuming that tastes and earning abilities are perfectly correlated, we prove that everyone must face a marginal price for the public sector's output which strictly exceeds its marginal cost if correlation is positive. These properties provide an economic rationale for the provision of "support for low-income consumers" as mandated by the universal service and similar regulatory policies. Finally, we show that with correlated characteristics, implementation can be achieved through two separate functions: a pricing function that depends only on the public sector output and a tax function that depends only on income.     

Supply‐ versus Demand‐Side Policies in the Presence of Carbon Leakage and the Green Paradox

We consider a climate coalition that seeks to reduce global emissions in the presence of carbon leakage and resource exhaustibility. We show that a credible announcement of future unilateral supply‐side policies delays foreign emissions, and we derive the optimal combination of consumer taxes and producer taxes when we consider leakages from free riders, both within periods and across periods. The tax shares generally differ over time. A decline in the present value of the social cost of carbon over time supports a time path where the consumers’ tax share of the total carbon tax also declines over time. We illustrate our findings with a numerical model.     

Climate policy vs. agricultural productivity shocks in a dynamic computable general equilibrium (CGE) modeling framework: The case of a developing economy

The main objective of this paper is to compare the cost of climate policy consistent with the 2 °C global warming target (Paris Agreement target) with the cost of climate change induced agricultural productivity shocks, using a recursive dynamic CGE model for India. The social cost of carbon, in terms of loss in agriculture sector, is estimated to be about 2 percent of GDP, at zero rate of discount, under conservative forecasts of fall in agricultural productivity. In comparison, the cost of climate policy consistent with the Paris Agreement target of 2 °C is about 1 percent of GDP. Thus, there is a strong case for the adoption of ambitious climate policy in India, provided other countries also adhere to the same. Besides, revenues generated from the carbon tax and emission allowance could be a means to support the development and adoption of new energy and agricultural technologies, to increase social sector expenditure and to reduce abatement costs.     

Job search and mobility in developing countries. Theory and policy implications

A labor market model is developed in which the formal sector is characterized by search frictions whereas the informal sector is competitive. We show that there exists a unique steady-state equilibrium in this dual economy. We then consider different policies financed by a tax on firms' profits. We find that reducing the unemployment benefit or the firms' entry cost in the formal sector induces higher job creation and formal employment, reduces the size of the informal sector but has an ambiguous effect on wages. We also find that an employment/wage subsidy policy and a hiring subsidy policy have different implications. In particular, the former increases the size of the informal sector while the latter decreases it.     

Climate change mitigation options and directed technical change: A decentralized equilibrium analysis

The paper considers an endogenous growth model with climate change as well as three R&D sectors dedicated to energy, CCS (Carbon Capture and Storage) and backstop efficiency. First, we characterize the set of decentralized equilibria: a particular equilibrium is associated with any vector of policy instruments including a carbon tax and a subsidy to each R&D sector. Second, we show that it is possible to express any equilibrium as the solution of a maximization program. Third, we solve the first-best optimum problem and thereby deriving the optimal instruments. Finally, we illustrate the theoretical model using calibrated functional specifications. In particular, we investigate the effects of various combinations of policy instruments (including the optimal ones) by determining the deviation of each corresponding equilibrium from the “laisser-faire” benchmark. We find notably that introducing an R&D subsidy hardly affects emissions when a carbon tax is already implemented, thus revealing a complementary effect between these two policy instruments.     

TWO‐SECTOR STOCHASTIC GROWTH MODELS*

This paper develops the study of two‐sector growth models of the form introduced by Arrow and Kurz (1970). We extend their deterministic model by allowing the population process to become random and by allowing the population to choose their level of effort. We find that under suitable conditions the government is able to tax and borrow in such as way as to induce the private sector to invest and consume along the path which the government considers optimal. Moreover, we also find that in some important cases the model can be solved explicitly in closed form, to the extent that we can write down expressions for tax rates and interest rates. This leads to new one‐factor interest rate models, with related taxation policies; numerical examples show very reasonable behaviour.     

Competition,taxation and economic growth

The paper mainly examines the relationship between economic growth, tax policy and sectoral labor distribution in an endogenous growth model with expanding varieties. For analyzing these relationships, we consider an economy where three sectors of production are vertically integrated: final goods sector, intermediate goods sector and research sector. We show that the extent of imperfect competition in the intermediate products market affects both economic growth and the allocation of the available labor to all the sectors employing this input. The resources from capital taxation, which are used for financing research sector, have a U-shaped effect on growth and lead to a movement of the labor from research sector to final goods sector. Additionally, we show that if there exists a higher competitive structure in an economy, the probability of the positive effect of an increase in tax on growth gets higher.     

Tax competition and the political economy of public employment: a model for Austria

In this work, we simulate the effects of the tax autonomy of the Austrian states on the levels of public employment in each state. We show that depending on the strength of the public sector lobby, tax autonomy would require a reduction of employment in the public sector of between 25 and 35% of the current level. We also show that tax autonomy increases welfare levels by 1–1.5%; that is, the positive change in the disposable income of the workers more than offsets the welfare loss resulting from the lower provision of public goods. Finally, we show that the reduction of public employment is superior in terms of welfare to an alternative scenario in which employment levels are held constant but the wage levels in the public sector are adjusted.     

Fiscal policy and the structure of production in a two-sector developing economy

This paper develops a two-sector model of a developing economy and examines the role of the informal sector in limiting the government's ability to increase tax revenues. A key feature is the introduction of auditing of the informal sector and degree of tax enforcement in that sector. We emphasize the interdependence between tax policy and enforcement in achieving a developing economy's fiscal objectives and show that by judicious policy choices the presence of the informal sector need not hinder its ability to raise tax revenues. We supplement the formal analysis with numerical simulations highlighting the contrasting intertemporal tradeoffs implied by higher tax rates and tax-enforcement levels.     

Moving beyond the iceberg model: The role of trade relations in endogenizing transportation costs in computable general equilibrium models

Modeling trade and transportation costs is an essential part of multiregional or spatial computable general equilibrium models where interregional trade plays an important rolein shaping economic activity. The majority of such models use the iceberg trade cost approach where part of the produced output (representing the material costs of transportation) is assumed to melt away during transportation. There are a few models which employ a more refined approach with an explicit transportation sector providing transportation services which are then used to ship goods between locations. In this paper we show that this approach, although much more convenient than the iceberg approach, still lacks full usability due to the fact that markets, hence prices are defined at the regional level and as a result, transportation costs can not be endogenous at the trade relation level. Moreover, under regional level market clearing the iceberg and the more detailed approach are equivalent. We propose to refine the definition of market equilibrium and move it to the trade relation level. Using this approach we can gain full advantage of the explicit transport sector in the model with respect to trade cost evolution. We show through simulations that refining the way trade costs are modelled indeed gains new insights, and that moving the market definition to the trade relational level leads to qualitative changes in the effect of labor supply shocks on main model variables. The paper also presents a method to estimate a SAM by reallocating data from standard industries to a transportation sector which is then consistent with the model setup. This SAM can be used to calibrate the refined model with a detailed transportation sector.     

Achieving the triple dividend in Portugal: a dynamic general-equilibrium evaluation of a carbon tax indexed to emissions trading

Using a dynamic general equilibrium model, we simulate the environmental, economic, and budgetary effects in Portugal of a new carbon tax indexed to the carbon price in the European Union’s Emissions Trading System market. Through careful recycling of the carbon tax revenues to finance lower personal income taxes, lower Social Security contributions, and higher investment tax credits – in particular when changes are directed at promoting energy efficiency – we show that it is possible to design a carbon tax reform that boosts economic growth and strengthens fiscal consolidation. These results served as the basis for a new carbon tax eventually approved by the Portuguese Parliament.     

PRODUCTIVE GOVERNMENT SPENDING,PATTERNS OF SPECIALIZATION AND ECONOMIC GROWTH IN A SMALL OPEN ECONOMY*

Constructing a two‐sector small open endogenous growth model with productive government spending, this paper examines patterns of specialization and the growth effects of fiscal policy. It is shown in this model that a change in income tax rate can cause a change in an equilibrium pattern of specialization. Because of this property, the relationship between the tax rate and the growth rate yields either a humped shape or a two‐humped shape, depending on world commodity prices. We also show that the growth maximizing tax rate is not necessarily equal to the tax rate that maximizes the level of social welfare.     

Corporate income tax,investment grants,and the cost of capital

While the influence of the corporate tax system on the cost of capital faced by firms in the corporate sector has been studied extensively, these studies generally assume that government intervention is restricted to alterations in the rates and deductibility allowances of the corporate income tax. In this paper the case where government intervention also includes the payment of investment grants to the corporate sector is considered; it is shown that the interactions between the corporate tax system and the grant structure are crucial in determiningthe cost of capital. In particular, conditions are derived under which a higher grant rate will raise the relative cost of capital.