Thomas I. Renstrom

Time Inconsistency in Environmental Policy: Tax Earmarking as a Commitment Solution

Tax earmarking imposes a constraint on government policymaking, and may be desirable if it solves a time-inconsistency problem in tax policy. In a two-period economy, in which the policy decisions regarding taxes, public goods provision, and pollution abatement are taken by a majority-elected individual, we show how the time-inconsistency problem in environmental policy arises. We demonstrate that the commitment equilibrium under no earmarking rules cannot be as fully implemented as a no-commitment equilibrium under earmarking rules. However, the earmarking rules do act as a partial commitment mechanism.

Inequality, Environmental Protection and Growth

We analyse how, in representative democracies, income distribution influences the stringency of environmental policy and economic growth. Individuals (who differ in abilities) live for two periods, working when young and owning capital when old. Externalities are caused by a polluting factor. The revenue from pollution taxation, as well as capital-income taxation, is redistributed in a lump-sum to the old. A majority-elected representative takes the fiscal decision, at each point in time. In politico-economic equilibrium, more inequality (in terms of the skewedness of the distribution) yields a lower pollution tax, a larger capital tax, and lower growth.

Endogenous Taxation: An Overlapping Generations Approach

This paper develops an overlapping generations framework of endogenous taxation. There are three types of heterogeneity among individuals: age, productivity, and bequest motives. The heterogeneity gives rise to a redistributive conflict and, therefore, to different preferences over fiscal policy. Linear taxes are levied on consumption expenditure, wage income, and capital income. These tax rates and the provision of a public good become endogenous through a majority-voting rule. The dynamic politico-economic equilibrium is examined both in and outside the steady state. The focus is on the underlying characteristics of the economy that gives rise to a particular fiscal structure. Copyright 1996 by Royal Economic Society.

OPTIMAL DYNAMIC LABOR TAXATION

We analyze optimal dynamic taxation when labor supply is indivisible. As in Hansen (1985) and Rogerson (1988), markets are complete, and an employment lottery determines who works. The consumer can buy insurance to diversify this income uncertainty. The optimal wage tax is generally positive except for some special cases when leisure is nonnormal and the government can use debt as a policy instrument in addition to its tax instruments. We derive a HARA class of preferences, for which we characterize the dynamic paths of the wage tax. The optimal paths of the labor tax differ between divisible- and indivisible-labor economies.

Tax evasion as a disciplinary mechanism for fiscal policy

The paper provides a theory where the size of the inspection authority and the size of the fines evolve endogenously. We find that if a society cannot commit to future taxes it may gain form committing to a small Inland Revenue Service and small punishments for tax evasion. The possibility of the public evading taxes limits the effectiveness of capital taxation. By setting detection probabilities and punishment relatively low, the government indirectly commits itself not to tax capital income too heavily in the future.

Imperfect Competition, Labour Market Distortions, and the Double Dividend Hypothesis. Theory and Evidence from Italian Data

The paper explores the hypothesis of a double dividend from environmental taxation i.e. whether shifting the burden of taxation away from labour toward the environment can boost employment and increase welfare. We present a general-equilibrium model where the economy is distorted by labour taxes, monopolistic product-market competition, and union-wage bargaining. We find that employment and welfare always increase when the revenue from the introduction of a Pigouvian tax (imposed on firms and households) is fully recycled to cut the rate of the pre-existing labour tax. Moreover, it turns out that the degree of the imperfections influences the magnitude of the effects of the reform. We also offer numerical results for the case in which the pollution tax is positive at the outset.

Environmental Policy and Capital Movements: The Role of Government Commitment

This paper explores the relationship between environmental protection and international capital movements, when tax policy is endogenous (through voting). A two-period general equilibrium model of a small open economy is specified to compare the effects of two different constitutions (commitment or no commitment in tax policy), as well as income inequality. Under the commitment regime, the equilibrium is characterised by a lower labour tax, higher environmental tax and less capital moving abroad than in the no-commitment equilibrium. Furthermore, given the degree of commitment, more equal societies are characterised by tougher environmental policy and less capital moving abroad.