We analyse environmental taxation in an international setting, where a multinational company produces a good whose consumption causes a negative externality. We study the joint effects of imperfect ...competition, corporate tax and profit-shifting activities on the optimal level of environmental taxation. In a two-country framework, we show that in both countries the environmental tax that is set lower than the level allowing to fully internalise environmental costs. Profit shifting causes a further decrease in the low-business-tax country. Finally, we show that policies aimed at reducing profit shifting may have countervailing effects on environmental tax setting.
•We analyse environmental tax setting in the presence of profit shifting.•In countries with higher corporate tax rates, profit shifting plays a neutral role.•The same is not true for countries where the corporate tax is low.•Measures fighting profit shifting have countervailing effects on environmental taxes.
We analyse two mechanism designs for refunding emission payments to polluting firms: output-based refunding (OBR) and expenditure-based refunding (EBR). In both instruments, emission fees are ...returned to the polluting industry, typically making the policy more politically acceptable than a standard tax. The crucial difference between OBR and EBR is that the fees are refunded in proportion to output in the former but in proportion to the firms’ expenditure on abatement technology equipment in the latter. To achieve the same abatement target as a standard tax, the fee level in the OBR design is higher, whereas the fee level in the EBR design is lower. The use of OBR and EBR may lead to large differences in the distribution of output and costs across firms. Both designs imply a cost-ineffective provision of abatement, as firms put relatively too much effort into reducing emissions through abatement technology compared with reducing output. However, a standard tax may be politically infeasible and maintaining output may be seen as a political advantage by policymakers if they seek to avoid activity reduction in the regulated sector.
This paper derives optimal income tax and human capital policies in a life cycle model with risky human capital. The government faces asymmetric information regarding agents’ ability, its evolution, ...and labor supply. When the wage elasticity with respect to ability is increasing in human capital, the optimal subsidy involves less than full deductibility of human capital expenses on the tax base and falls with age. Income-contingent loans or a deferred deductibility scheme can implement the optimum. Numerical results suggest that full deductibility of expenses is close to optimal and that simple linear age-dependent policies perform very well.
In this article we use an original data set to provide the first empirical analysis of the political economy of inherited wealth taxation that covers a significant number of countries and a long time ...frame (1816–2000). Our goal is to understand why, if inheritance taxes are often very old taxes, the implementation of inheritance tax rates significant enough to affect wealth inequality is a much more recent phenomenon. We hypothesize alternatively that significant taxation of inherited wealth depended on (1) the extension of the suffrage and (2) political conditions created by mass mobilization for war. Using a difference-in-differences framework for identification, we find little evidence for the suffrage hypothesis but very strong evidence for the mass mobilization hypothesis. Our study has implications for understanding the evolution of wealth inequality and the political conditions under which countries are likely to implement policies that significantly redistribute wealth and income.
How should governments with a preference for redistribution design tax policies when facing limited borrowing? This paper studies optimal taxation in a small open economy with heterogeneous agents ...and endogenous debt constraints arising from the government's limited commitment to fiscal policies. The optimal labor tax decreases over time and is nonzero in the limit, and the optimal capital and domestic borrowing taxes are positive in the limit, deviating from the standard Ramsey tax results. The government's redistributive motive directly affects optimal tax levels, whereas binding debt constraints influence optimal tax dynamics. In the numerical analysis, a stronger redistributive preference requires greater initial tax distortions and a higher external debt level in the long run.
A substantial literature examines how the Pigouvian directive that marginal taxes should equal marginal external harms needs to be modified in light of the preexisting distortion due to labor income ...taxation. Additional literature considers distributive concerns. It is demonstrated, however, that simple first-best rules—unmodified for labor supply distortion or distribution—are correct in the model examined. Specifically, setting all commodity taxes equal to marginal harms (and subsidies equal to marginal benefits) can generate a Pareto improvement, as can a marginal reform toward the first-best. Qualifications and explanations for differences from previous work are also presented.
A substantial increase of green investments is still required to reach the Paris Agreement’s emission targets. Yet, capital markets to expedite innovative green investments are generically ...constrained. Literature has shown that governments could de-risk such investments. Empirical beta pricing and yield estimates reveal some public involvement in the green bond market, especially for long maturity bonds. We provide empirical evidence that Governments and Multilateral organizations can de-risk green investments by supporting the issuance of green bonds in contrast to private green bonds - that show higher yields, volatility and beta prices - and conventional energy bonds, that are more volatile due to oil price variations. Since lower betas also mean lower capital costs, we use these empirical results and run a dynamic model with two types of firms, modeling the economic behavior of innovators (renewable energy firms) and incumbents (fossil fuel firms). Our model reveals that de-risked interest rates, from the cost side, and mark-ups and profit flows, from the market side, improve new entrants’ performance. As innovators normally have low mark-ups, inducing higher profit flows and lower capital costs allows a better default risk control and debt repayment which keep the firms in the market for a longer period of time and maintain low debt levels. Subsidies and carbon taxation can complement the role of the de-risked interest rate and expedite the energy transition.
We consider a world in which countries apply optimal taxes on mobile capital and savings (like in Bucovetsky and Wilson, 1991). Firms and savers may underreport income to avoid or evade taxation. We ...show that, even in the presence of underreporting, the equilibrium under tax competition may still be constrained-efficient (in the sense that there is no scope for welfare-enhancing tax coordination). This is the case if the marginal social costs of underreporting savings and investment income are equal. The model demonstrates that, if source-based taxes on capital are inefficiently low, as is often assumed, taxes on savings must be inefficiently high. Constrained-efficient tax policy minimizes the social cost of underreporting. The results are robust to introducing taxes on profit or labor income, if these types of income can be underreported as well. We conclude that commonly held assumptions on the need for coordination under tax competition need to be revised or qualified.
•Tax competition with taxes on investment and savings income, which both may be underreported.•Equilibrium is constrained-efficient if marginal social costs of underreporting are equal.•If not, one tax is inefficiently high, the other one inefficiently low.•Constrained-efficient tax policy minimizes social cost of underreporting.•Results are robust to introducing taxes on underreported labor income and profit, asymmetries, foreign firm ownership.
Dynamically and statically optimal Pigouvian subsidies and taxes on durables will differ in a growing economy. In a dynamic game, consumers may delay purchasing durables with positive externalities, ...such as latrines, anticipating greater future subsidies. Governments can most cheaply induce optimal purchasing by commiting to make subsidies temporary. Foreign donors may make commitment impossible, generating delays in private investment that more than fully offset the social benefits of transfers. Anticipated future taxes or regulation of durables with negative externalities, such as guns, may encourage current purchase, potentially causing policymakers who would otherwise prefer taxes or regulation to abandon such policies.
This study is the first attempt at promoting agricultural input subsidy policies in a computable general equilibrium framework on two main dimensions of food security (i.e. food availability and ...access to food), poverty and income distribution in Malaysia for all ethnic groups. This study investigates the short-run impacts of two subsidy removal policy and one subsidy expansion policy using 2010 input-output table. Results show that both subsidy removal policies negatively influence agricultural sectors and economic growth of Malaysia while the expansion policy influence them positively. The removal policies also decrease food availability and access to food and, consequently, increase poverty at the national level and the poverty level of Malay household, while the expansion policy increases food availability and access to food and alleviate the poverty level of Malay household. The complete removal policy without paddy/rice subsidies increases rice production and raises food availability and access to food commodities (or food security) in the country resulting in a lesser increase in poverty compared to the complete removal policy.
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