EXPLICIT PRICE ON CARBON
Placing a price on carbon as an increase in indirect taxation with no changes in existing taxes can compound the distortions and the tax rate, notes John Freebairn of the University of Melbourne in `A Tax Mix Change to Reduce Greenhouse Gas Emissions'. The paper opens by acknowledging that placing a price on greenhouse gas emissions, either through a tax or a tradable permit scheme, is a cost-effective way to internalise the external pollution cost. The author hastens to point out that, from a government perspective, the policy intervention represents an increase in the aggregate indirect tax burden and it provides a windfall revenue gain. He adds that most of the additional indirect tax is passed forward to consumers as higher prices. As well as increasing the relative prices of greenhouse gas intensive products and production processes, placing a price on carbon increases the average cost of living, underlines Freebairn. "The consumer price effects are regressive, they aggravate the distortions caused by current income and consumption taxes to work and save by households, and they provide incentives for employees and investors to seek compensating increases in nominal wages and interest rates." He argues that returning the indirect tax revenue windfall to households as reductions in income taxation, and increases in social security payments, as a component of a policy package which is approximately aggregate revenue-neutral and vertical distribution equity-neutral largely can eliminate the undesired effects. "Presenting a tax mix change package also may improve political acceptance of an explicit price on carbon." Insights of value on an important topic.
Testing out tax policies
Constructing an open economy macroeconomic model calibrated to two economies, viz. the US and a subset of the EMU (European Monetary Union), Stéphane Auray, Aurélien Eyquem, and Paul Gomme infuse into the model a few key features such as a full set of tax instruments (capital income, labour income, consumption), and incomplete financial markets (allowing for wealth transfers following a policy change). Their paper titled `A Tale of Tax Policies in Open Economies' speaks of two sets of policy experiments conducted using the model. "The first consisted of permanent tax increases geared to reducing the government deficit-to-GDP ratio by one percentage point. This first set of experiments was motivated by recent events pointing to the need for fiscal reform in a number of developed countries," the authors report. They observe that the consumption tax was the least costly in terms of welfare, and that it was also the most successful tax increase in terms of deficit reduction. In contrast, an increase in the capital income tax can lead to a short-term increase in consumption as households draw down their capital stocks, one learns. "Over short horizons, the increased capital income tax leads to measured welfare gains although in terms of lifetime utility, there was a substantial welfare loss…" - www.thehindubusinessline.com
Placing a price on carbon as an increase in indirect taxation with no changes in existing taxes can compound the distortions and the tax rate, notes John Freebairn of the University of Melbourne in `A Tax Mix Change to Reduce Greenhouse Gas Emissions'. The paper opens by acknowledging that placing a price on greenhouse gas emissions, either through a tax or a tradable permit scheme, is a cost-effective way to internalise the external pollution cost. The author hastens to point out that, from a government perspective, the policy intervention represents an increase in the aggregate indirect tax burden and it provides a windfall revenue gain. He adds that most of the additional indirect tax is passed forward to consumers as higher prices. As well as increasing the relative prices of greenhouse gas intensive products and production processes, placing a price on carbon increases the average cost of living, underlines Freebairn. "The consumer price effects are regressive, they aggravate the distortions caused by current income and consumption taxes to work and save by households, and they provide incentives for employees and investors to seek compensating increases in nominal wages and interest rates." He argues that returning the indirect tax revenue windfall to households as reductions in income taxation, and increases in social security payments, as a component of a policy package which is approximately aggregate revenue-neutral and vertical distribution equity-neutral largely can eliminate the undesired effects. "Presenting a tax mix change package also may improve political acceptance of an explicit price on carbon." Insights of value on an important topic.
Testing out tax policies
Constructing an open economy macroeconomic model calibrated to two economies, viz. the US and a subset of the EMU (European Monetary Union), Stéphane Auray, Aurélien Eyquem, and Paul Gomme infuse into the model a few key features such as a full set of tax instruments (capital income, labour income, consumption), and incomplete financial markets (allowing for wealth transfers following a policy change). Their paper titled `A Tale of Tax Policies in Open Economies' speaks of two sets of policy experiments conducted using the model. "The first consisted of permanent tax increases geared to reducing the government deficit-to-GDP ratio by one percentage point. This first set of experiments was motivated by recent events pointing to the need for fiscal reform in a number of developed countries," the authors report. They observe that the consumption tax was the least costly in terms of welfare, and that it was also the most successful tax increase in terms of deficit reduction. In contrast, an increase in the capital income tax can lead to a short-term increase in consumption as households draw down their capital stocks, one learns. "Over short horizons, the increased capital income tax leads to measured welfare gains although in terms of lifetime utility, there was a substantial welfare loss…" - www.thehindubusinessline.com
No comments:
Post a Comment