Effects of Carbon Taxes in an Economy with Prior Tax Distortions: An Intertemporal General Equilibrium Analysis

This paper analyzes the costs of carbon taxes in a model that recognizes interactions between this tax and pre-existing taxes. First we examine the extent to which costs of a U.S. carbon tax are reduced when its revenues finance cuts in income taxes. Such use of revenues significantly reduces, but does not eliminate, the overall policy costs. The positive overall costs reflect the carbon tax′s focus on intermediate inputs and its relatively narrow base in comparison with income taxes. We also examine the sensitivity of the carbon tax′s costs to the level of pre-existing taxes. For any given use of revenues, welfare costs rise significantly with pre-existing tax rates, indicating that models disregarding pre-existing taxes may substantially understate the costs of new environmental tax initiatives.     

A note on optimal taxation of environmental spillovers

This note addresses the question of what policy the government should adopt when industrial pollution can be reduced partially by the imposition of effluent taxes and partially by a publicly operated waste treatment plant.In the case of increasing returns to public abatement, an effluent tax set at marginal user cost will not generate enough revenue to finance the facility. The key issue is that of finding additional revenue the most efficiently. Here, this question is dealt with in the framework of commodity taxation, with consideration given to the possibility that both effluent and commodity taxes derived on efficiency grounds might be quite regressive.     

Redistribution and pollution taxes with non-linear Engel curves

This paper analyses optimal corrective taxation and optimal income redistribution. The Pigouvian pollution tax is higher if pollution damages disproportionally hurt the poor due to equity weighting of pollution damages. Moreover, under general utility functions, optimal pollution taxes should be set below the Pigouvian tax if the poor spend a disproportionate fraction of their income on polluting goods. However, if Engel curves are linear, optimal pollution taxes should follow the first-best rule for the Pigouvian corrective tax even if the government wants to redistribute income and the poor spend a disproportional part of their income on polluting goods. The often-used quasi-linear, CES and Stone-Geary utility functions all have linear Engel curves. If Engel curves are linear, and if pollution taxes are not optimised, Pareto-improving green tax reforms exist that move the pollution tax closer to the Pigouvian tax. Simulations demonstrate that optimal corrective taxes should be Pigouvian if the demand for polluting goods is derived from a LES demand system, but deviate from the Pigouvian taxes if demand for polluting goods demand is derived from a PIGLOG demand system.     

Substituting pollution taxation for general taxation: Some implications for efficiency in pollutions taxation

Earlier papers have recognized that nonenvironmental benefits will be realized if pollution taxes are substituted for other taxes which impose efficiency losses on society. The purpose of this paper is to investigate the importance of these nonenvironmental benefits for the design of an efficient pollution tax. It is found that the efficient tax may be higher or lower than that conventionally defined as optimal, and that the net benefit from unrestrained pollution can have important implications for the size of the tax.     

Pigou meets Mirrlees: On the irrelevance of tax distortions for the second-best Pigouvian tax

This paper extends the Mirrlees (1971) model of optimal income redistribution with optimal corrective taxes to internalize consumption externalities. Using general utility structures and exploring both linear and non-linear taxes, it is demonstrated that the optimal second-best tax on an externality-generating good should not be corrected for the marginal cost of public funds, since it equals one in the optimal tax system. In the optimum, distortions of income taxes are equal to marginal redistributional gains. If the government does not have access to a non-distortionary marginal source of finance, the marginal cost of public funds can be either larger or smaller than one depending on subjective preferences for income redistribution. The optimal second-best corrective tax is then either higher or lower than the Pigouvian level. The findings in this paper generalize and amend prior results based on representative-agent models, shedding new light on the weak double-dividend hypothesis, and on the welfare gains of recycling revenue from environmental taxes.     

Equity impacts of proposals for federal product charges

Pollution taxes have been studied as instruments for promoting environmental objectives in an efficient manner. Their adoption has also been recommended, although less rigorously, on equity grounds. In the case of solid wastes it has been contended that persons whose waste generation occasions local public outlays for refuse service should pay commensurately, but that they often do not under general revenue financing. How proposals for federal product charges might reduce current inequities, so conceived, is the subject of the paper. The behavioral responses of local public officials to federal grants funded by charge revenues and the design of the grant formula are identified as potentially important factors in that regard.     

Estimates from a consumer demand system: implications for the incidence of environmental taxes

Most studies suggest that environmental taxes are regressive, making them less attractive policy options. We consider the distributional effects of a gasoline tax increase using four incidence measures and under three scenarios for gas tax revenue use. To incorporate behavioral responses we use Consumer Expenditure Survey data to estimate a consumer demand system that includes gasoline, other goods, and leisure. Our estimates confirm that when revenues are not recycled, a gasoline tax is regressive. Use of incidence measures that ignore demand responses, however, will substantially overstate this regressivity. In contrast, the differences between the equivalent variation and easier-to-implement consumer surplus measures are relatively small. In addition, our results suggest that using the additional gas tax revenue to fund labor tax cuts makes the policy substantially less regressive while using the revenue to fund lump-sum transfers actually makes it progressive.     

Can pollution tax rebates protect low-wage earners?

Pollution taxes are believed to burden low-income households that spend a greater than average share of income on pollution-intensive goods. Some proposals offset that effect by returning revenue to low-income workers via reduced labor tax. We build analytical general equilibrium models with both high-skilled and low-skilled labor, and we solve for the change in real net wage of each group. Decomposition shows the separate effects of the tax rebate, higher product prices, and the changes in relative wage rates. We also include numerical examples. Even though the pollution tax injures both types of labor, in most cases we find that returning all of the revenue to low-skilled workers is still not enough to offset higher product prices. Changes in relative wage rates may further hurt low-skilled labor. Protecting low-income workers is possible in this model only if they are defined as those below a relatively low wage threshold, but we discuss many possible elaborations of this model that could affect those results.     

Tax evasion and optimal environmental taxes

This paper introduces a new argument to the debate about the role of environmental taxes in modern tax systems. Some environmental taxes, particularly taxes on gasoline or electricity, are more difficult to evade than taxes on labor or income. When the tax base is shifted in a revenue-neutral manner toward these environmental taxes, the result is a net reduction in the amount of tax evasion. Using a carbon tax as a motivating example, the “tax evasion effect” is shown to sharply reduce the welfare cost of controlling emissions. A simple computable general equilibrium model suggests that the impact of considering tax evasion can be large: costs are lowered by 28% in the United States, by 89% in China, and by 97% in India. In countries with high levels of pre-existing tax evasion, a carbon tax will pay for itself through improvements in the efficiency of the tax system.     

Forest Taxation and Rotation Age under Private Amenity Valuation: New Results

This paper studies the impact of harvesting, property, and profit taxes on private rotation age in an ongoing rotations model, where the private landowner is interested not only in the present value of harvest revenue, but also in the private amenity services provided by the forest stand. The main finding of the paper is that conventional wisdom about the rotation effects of forest taxes, distilled from the Faustmann model, predominantly ceases to hold. This is because forest taxes distort the relative profitability of timber and amenity production in a way that is sensitive to the precise nature of amenity valuation. Therefore, the design of forest tax policy necessitates good knowledge of the landowner's objective function concerning the type of amenity services.     

Do you not like Pigou, or do you not understand him? Tax aversion and revenue recycling in the lab

Tax-aversion reduces the likelihood that price rationing can be a politically viable tool for environmental protection. We examine the case of the classic Pigouvian tax to control a negative externality, and consider how recycling the revenues, labeling of the tax and information about its purpose affects the support for taxation. We test the support for taxation within a single-price market experiment, in which purchases by some buyers impose external costs on others. Observing behavior consistent with tax-aversion, we also find that recycling the revenues to more narrowly targeted groups seems to increase support for taxation. In the absence of narrow revenue recycling, labeling a Pigouvian instrument as a ‘tax’ may significantly lower the likelihood of voter support.     

The efficiency of paying compensation in the Pigovian solution to externality problems

This note examines the efficiency of giving the victim of an externality the revenue raised by a tax on the injurer when the injurer and victim bargain with each other and act strategically. If the government has full information about the externality problem, then compensation is compatible with, but is not required for, the attainment of efficiency. If the government has limited information, then the desirability of compensation depends on the parties' behavior. In general, there is not an a priori case against compensation.     

Pollution control and technological advance: A dynamic model of the firm

The paper extends the static comparison of effluent taxes and effluent standards to a dynamic world in which firms invest resources in improving their abatement technology as well as their production technology. The analysis shows that the two pollution control policies lead to a distinctly different allocation of research and development (R & D) funds between improvement in abatement technology and improvement in production technology. The model also shows that a temporally constant effluent tax leads to an increasing effluent discharge rate for “typical” firms. Other results concern the pattern of output growth and the rate of technological advance.     

Intergenerational aspects of ecotax reforms – An application to Germany

In a model of overlapping generations and majority voting, we analyze an ecotax reform consisting of the tax rate and the budgetary rule. Revenue can be recycled through a lump-sum transfer or a reduction in pension contributions. Our theoretical results as well as the calibration of our model to the German economy show that the median voter's preferred tax rate may exceed the efficient rate. This holds whenever income of the decisive voter is sufficiently high compared to the average income, as rich individuals benefit more from a reduction in pension contributions than they are harmed by an increase in ecotaxes. The calibration confirms that the median voter prefers the earmarking of tax revenue for reductions in pension contributions to the alternative lump-sum transfer. This is quite an accurate prediction of the situation in Germany. Aging of society as expected for Germany lowers the ecotax in the political equilibrium below its optimal level.     

Controlling stock externalities in a common property fishery subject to uncertainty

Two methods are examined for regulating stock externalities under uncertainty: quotas and taxes. Dynamic programming is used to characterize the externalities precisely. The accuracy with which the current size of the resource stock can be monitored is found to be of crucial importance in the choice between tax and quota regulation. If the current stock is observed without error, taxes are capable of outperforming any quota.     

Designing Forest Taxes with Varying Government Preferences and Budget Targets

A model of forest policy design is constructed to examine how government preferences affect the choice of forest taxes. Government preferences are modelled by assuming that the government faces a binding revenue constraint and cares about the provision of public goods from forests. The equilibrium is second best given the imposition of the revenue constraint on the government's decision making. Our results show that a revenue-constrained government will make different choices than a government that does not face revenue constraints. This has important implications for the choice of property and harvest taxes, as well as Pigouvian forest taxes.     

Double dividend hypothesis, golden rule and welfare distribution

This paper analyzes the double dividend issues within the framework of overlapping generations models. We characterize the necessary conditions for obtaining a double dividend, i.e. an improvement of environmental and non-environmental welfare when the revenue from the pollution tax is recycled into a change in the labor tax rate. We show that, depending on the initial capital stock and on the intertemporal elasticity of substitution, conditions may be defined to simultaneously allow (i) the obtaining of a long-term double dividend, (ii) the economy to move closer to the modified golden rule and (iii) in the short term, an improvement in the welfare of the two present generations.     

Strategic pollution control and capital tax competition

In an analytical model of symmetric countries with mobile capital and local or transboundary pollution we investigate whether competition in emissions taxes (or emissions caps) and capital taxes leads to efficient outcomes when governments act strategically. When they have capital taxes and emissions caps at their disposal, they refrain from taxing capital and set their caps inefficiently lax [efficient] for transboundary [local] pollution. When they have the option to tax capital and emissions, capital is subsidized [untaxed] and emissions taxes are inefficiently low [efficient] for transboundary [local] pollution. In case of transboundary pollution emissions caps are Pareto-superior to emissions taxes. That holds regardless of whether the environmental policy is applied as stand-alone policy or combined with capital tax competition.     

Ancillary benefits of reduced air pollution in the US from moderate greenhouse gas mitigation policies in the electricity sector

Actions to slow atmospheric accumulation of greenhouse gases also would reduce conventional air pollutants yielding “ancillary” benefits that tend to accrue locally and in the near-term. Using a detailed electricity model linked to an integrated assessment framework to value changes in human health, we find a tax of $25 per metric ton of carbon emissions would yield NO_x-related health benefits of about $8 per metric ton of carbon reduced in the year 2010 (1997 dollars). Additional savings of $4–$7 accrue from reduced investment in NO_x and SO₂ abatement in order to comply with emission caps. Total ancillary benefits of a $25 carbon tax are $12–$14, which appear to justify the costs of a $25 tax, although marginal benefits are less than marginal costs. At a tax of $75, greater total benefits are achieved but the value per ton of carbon reductions remains roughly constant at about $12.     

Dynamic adjustment to land taxation policy: Neutrality and welfare implications

In this paper we use a dynamic three sector model to examine the neutrality and welfare effects of land income taxes. We find that (1) taxes that are neutral in long run equilibrium need not be neutral in the short run; (2) short run neutrality depends upon the tax treatment of development costs and losses; and (3) many of the neutrality results hold under both static and rational expectations assumptions. We also find that, even without externality assumptions, nonneutrality in the short run does not necessarily entail a welfare cost and may be welfare-enhancing when agents have less-than-perfect foresight.