Environmental Policy and Optimal Taxation in a Decentralized Economic Federation

2018

IRERE

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This paper surveys research on optimal redistributive taxation in economies with environmental externalities. A major question is whether externality correction only motivates an adjustment of the tax policy rule for the externality-generating activity, or whether the marginal value of the externality directly enters the policy rules for other tax instruments as well. In a static benchmark model with an atmospheric consumption externality, where the government uses a mix of a nonlinear income tax and linear commodity taxes, we show that Sandmo's (1975) additivity property applies. This means that externality correction leads to an additional term (measuring the marginal value of the externality) in the commodity tax formula for the externality generating good, while the policy rules for commodity taxation of clean goods and marginal income taxation take the same form as in the absence of any externality. We also extend this benchmark model to capture a number of scenarios (such as non-atmospheric externalities, border trade in the externality generating good, and competition between governments in a multi-country framework), where the additivity property no longer applies. We end by examining an intertemporal model of optimal taxation with a stock-externality, allowing us to integrate the study of optimal redistributive taxation with literature on environmental economics and policy based on dynamic models.

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confidence: 99%

Optimal Taxation, Redistribution, and Environmental Externalities

Aronsson

2018

IRERE

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“…9. This motive for using marginal income taxation was also addressed by Aronsson, Jonsson, and Sjögren (2006), let be in a simplified model without asymmetric information.…”

Section: Appendixmentioning

confidence: 98%

“…1 Earlier research in the former category, nevertheless, addresses a variety of issues such as comparisons between noncooperative and cooperative regimes with respect to tax policies and labor mobility (Aronsson and Blomquist 2003), fiscal competition due to international trade Gahvari 2004, 2005), and strategic aspects of public policy in the context of economic federations (Silva and Caplan 1997;Caplan and Silva 1999;Aronsson, Jonsson, and Sjögren 2006).…”

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confidence: 99%

“…The literature on fiscal policy in second best economies with transboundary environmental problems is relatively small by comparison with the corresponding literature dealing with fiscal policy in second best economies with local (i.e., within-jurisdiction) environmental damage. 1 Earlier research in the former category, nevertheless, addresses a variety of issues such as comparisons between noncooperative and cooperative regimes with respect to tax policies and labor mobility (Aronsson and Blomquist 2003), fiscal competition due to international trade (Cremer and Gahvari 2004, 2005), and strategic aspects of public policy in the context of economic federations (Silva and Caplan 1997; Caplan and Silva 1999; Aronsson, Jonsson, and Sjögren 2006).…”

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confidence: 99%

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Mixed Taxation and Transboundary Externalities

Aronsson

Persson

2013

Public Finance Review

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This article concerns income taxation and commodity taxation in a multijurisdiction framework with transboundary environmental damage. The decision problem facing the government in each such jurisdiction is represented by a two-type model (with asymmetric information between the government and the private sector). We show how the possibility to influence the world market producer price adds mechanisms of relevance for redistribution and externality correction which, in turn, affect the domestic use of taxation. Finally, with the noncooperative Nash equilibrium as a reference case, we consider the welfare effects of policy coordination.

“…Another issue that has been addressed in the context of decentralized leadership is environmental policy. 8 Aronsson et al (2006) consider a model where the central authority sets emission targets to be implemented by the lower-level jurisdictions. The governments in the lower-level jurisdictions face a mixed tax problem, and it is shown how the lower-level governments use their policy instruments to influence the emission target imposed by the central authority.…”

Section: Introductionmentioning

confidence: 99%

Labor income taxes in an economic federation with proportional membership fees

2019

Int Tax Public Finance

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A significant part of the revenue in the EU budget is raised via a GNI-based resource. The purpose of this paper is to use a stylized model of an economic federation to analyze how this way of raising funds to the central authority affects the labor income taxes implemented by the lower-level governments. This question is analyzed both when the federal fee is proportional to GNI and proportional to GDP. One key result is that if the government in a lower-level jurisdiction acts as a Nash follower vis-a-vis the other governments in the public sector, then there is an incentive to implement a higher tax on labor. Another is that if the lower-level government is able to exercise decentralized leadership vis-à-vis a federal government which is concerned with redistribution, then the incentive structure underlying the taxation of labor is independent of how the federal government collects its revenue.