Panagiotis Tsigaris

The Design of a Consumption Tax under Capital Risk

This paper focuses on the design of a consumption tax in a world of capital risk. The certainty literature discusses two standard options, namely the cash flow method and the pre-payment method (i.e., the wage tax), and finds the two approaches to be equivalent. Models that consider capital risk (via asset choice) reach different conclusions. This discrepancy arises in part due to a different choice of the social discount rate. In light of the failure of the discount-rate argument to resolve the issue at hand, we explore the market certainty equivalence of risky government revenue. We let revenue risks stay in the private sector, and examine the market value of the feasible transfer (e.g., in the form of a public good) back to households. We reach three broad conclusions. First, we find that if the state returns to each household its own tax-revenue risks, equivalence will be re-established as in certainty models. Next, we show that if the state engages in intergenerational risk sharing (e.g., through a system of stochastic tax transfers), the wage tax cannot be construed to be a valid pre-payment alternative to the cash flow or a modified wage-tax-ation system. Efficient risk allocation across generations under a cash flow tax (or, one that includes future capital gains as well as wages in the tax base) leads to a Pareto improvement over the simple wage tax. Finally, a major policy implication follows; in order to be practicable, a consumption tax would have to be implemented via registered savings accounts much in the fashion of the Canadian registered retirement savings plans program rather than through the pre-payment route.

The Efficiency Loss of Capital Income Taxation Under Imperfect Loss Offset Provisions

The importance of capital loss offset provisions in a world of risk is well documented in the tax literature. However, the potential deadweight losses owing to imperfect offset has not been fully explored. This article develops a framework, whereby that investigation can be carried out, and uses numerical simulations to investigate the size of potential losses. The results obtained show that welfare losses owing to the absence of offset provisions could be substantial. Under plausible assumptions about attitudes toward risk and time preference, and with a capital income tax rate of 35 percent, over forty-five cents per dollar of tax revenue raised may be dissipated. In contrast, full loss offset may reduce that loss to approximately twelve cents.

Land Preservation in British Columbia: An Empirical Analysis of the Factors Underlying Public Support and Willingness to Pay

This study extends previous empirical research on land preservation by considering an actual land preservation scheme, the agricultural land reserve in British Columbia, Canada. The reserve was established in 1973 to ensure that development did not occur on the province’s most productive agricultural land. ‘To ensure that local food production is maintained,’ ‘the economic importance of British Columbia’s agricultural sector,’ and ‘to protect the environment’ are the most important factors that underlie support for the reserve. Aggregate, provincewide willingness to pay to maintain the land reserve is substantial, with our most conservative estimate being Can

Uncertainty and the Double Dividend Hypothesis

91.18 million per year.

The Potential Impacts of Climate Change on Piketty's Measure of Wealth Inequality

This paper examines the double dividend hypothesis in the presence of labour income uncertainty. Empirical evidence shows that uncertainty over labour income is particularly significant in developing, while not negligible in developed countries. Under uncertainty, and assuming incomplete capital markets, the tax system plays a role in providing social insurance and a green tax reform influences its effectiveness. We show that the increase in environmental tax reduces consumption risk while the balanced budget decrease in labour income tax increases income risk. We find that the total welfare effect of a green tax reform differs substantially from the case of certainty. The critical parameters determining the existence of a second dividend are the lump sum transfers, the relative substitutability of the two goods for leisure and the initial tax rates relative to their optimal that determine also the response of labour supply to a change in the tax mix.

A simple climate-Solow model for introducing the economics of climate change to undergraduate students

A climate-Solow model is used to examine the potential impacts of climate change on the capital-to-income ratio and the net of depreciation share of income to capital, a measure of wealth concentration and income distribution between capital and labour respectively, over the next two centuries. The capital-to-income ratio will eventually fall if damage from climate change increases the depreciation rate of capital. However, this decline in the capital-to-income ratio is somewhat mitigated if climate change acts to slow labor-augmenting technical progress. The capital to income ratio will increase more with climate change, if labour productivity is impacted. However, in the early part of next century, beyond 2100, this increase is because income will start falling faster than capital (wealth) declines. Furthermore, climate change reduces the net share of income accruing to capital in all scenarios and is most severely impacted when climate change reduces the growth rate of labour productivity. The implications are clear that the owners of capital should favour policies that mitigate climate change.

The Utility Compensated Effects of a Wage Tax on Human Capital and Consumption Decisions

In this paper the simplest integrated assessment model is developed in order to illustrate to undergraduate students the economic issues associated with climate change. The growth model developed in this paper is an extension of the basic Solow model and includes a simple climate model. Even though the model is very simple it is very powerful in its predictions. Students use the model to explore various scenarios illustrating how economic activity today will inflict damages from higher temperatures on future generations. But students also observe that future generations will be richer than today’s generation due to productivity growth and population stabilization. Hence, the richer future generations will not be as rich as they would be without climate change. Since the cost of action is absorbed by the current generation and the benefits of action accrue to future generations students can conduct a cost-benefit analysis and explore the importance of the discount rate. The appendix provides step-by-step instructions for students to setup the model in MS Excel and to conduct simulations.

Illustrating Environmental Issues by Using the Production-Possibility Frontier: A Classroom Experiment

In this article, the authors show that a wage tax, which neither alters the relative price of current versus future consumption nor distorts the relative expected return (vis-à-vis the cost) to investing in human capital, leads to biases at both these margins. The authors find that the common assumptions of decreasing absolute risk aversion and nondecreasing relative risk aversion are sufficient for a wage tax increase to yield a stimulating effect on human capital as well as current consumption. Finally, the authors reinterpret the above findings in the context of the well-known analysis of taxation of financial assets in a two-period portfolio choice model.

Choice of Tax Base Revisited: Cash Flow vs. Prepayment Approaches to Consumption Taxation

The authors develop a new classroom experimental game to illustrate environmental issues by using the production-possibility frontier in an introductory economics course. Waste evolves as a byproduct of the production of widgets. Environmental cleanup is produced by reallocating scarce resources away from the production of the dirty good. In addition to the description of the game and classroom discussion, the authors illustrate how the students’ experience with the game can be used as the basis for exercises on production decisions and environmental regulation.

Environmental Externalities in the Presence of Network Effects: Adoption of Low Emission Technologies in the Automobile Market ∗

This paper re-examines the issues involved in the design of a direct tax on consumption, an idea that has received a fair degree of acceptance in the transition countries over the past decade (e.g., tax reforms in Croatia and Moldova). First we argue that on the subject of equivalence among a set of taxes, the only meaningful comparison is along the ex-ante concept of equivalence, and not ex-post. The latter as we shall see requires highly implausible, and often arbitrary, choice scenarios. We carry out the analysis in a variety of models starting with the two-period consumption-saving choice under full certainty. However, a good part of the discussion is carried out where the portfolio choice behaviour is embedded in an intertemporal savings model that has been widely discussed in the literature. We then take up more complete (and necessarily more complex) choice situations for examination. Indeed the first of two variations of the above is a model where individuals make work-leisure (for a given skill level) as well as the safe-risky asset choice. The last is of risky human capital choice, where the physical investment is restricted to a single non-risky asset. For the purposes of the paper, the models are very general, and the precise choice context is open to wider interpretations than how they are actually phrased. In spite of our preoccupation with the efficiency aspects, we are interested in other important issues of equity, and those of an administrative nature. But our remarks on the latter fronts are limited to the insight that we directly gain from the analytics.