Public Economics Commons^™

Multiple Pollutants, Co-Benefits, And Suboptimal Environmental Policies, Don Fullerton, Daniel Karney

Don Fullerton

Negative Leakage, Kathy Baylis, Don Fullerton, Daniel Karney

Don Fullerton

Our analytical general equilibrium model solves for effects of a small increase in carbon tax on leakage – the increase in emissions elsewhere. Identical consumers buy two goods using income from endowments that are mobile between sectors. Usually an increase in one sector’s tax raises output price, so consumption shifts to the other good, causing positive leakage. Here, we find a new negative effect not recognized in existing literature: the taxed sector substitutes away from carbon into clean inputs, so it may absorb resources, shrink the other sector, and reduce their emissions. This “abatement resource effect” can offset most or …

Can A Unilateral Carbon Tax Reduce Emissions Elsewhere?, Joshua Elliott, Don Fullerton

Don Fullerton

One country or sector that tries to reduce greenhouse gas emissions may fear that other countries or sectors will get a competitive advantage and increase emissions. Computable general equilibrium (CGE) models such as Elliott et al (2010a,b) indicate that 15% to 25% of abatement might be offset by this “leakage.” Yet the Fullerton et al (2012) simple two-sector analytical general equilibrium model shows an offsetting term with negative leakage. In this paper, we use a full CGE model with many countries and many goods to measure effects in a way that allows for this negative leakage term. We vary elasticities …

Vehicle Choices, Miles Driven, And Pollution Policies, Ye Feng, Don Fullerton, Li Gan

Don Fullerton

Mobile sources contribute large percentages of each pollutant, but technology is not yet available to measure and tax emissions from each vehicle. We build a behavioral model of household choices about vehicles and miles traveled. The ideal-but-unavailable emissions tax would encourage drivers to abate emissions through many behaviors, some of which involve market transactions that can be observed for feasible market incentives (such as a gas tax, subsidy to new cars, or tax by vehicle type). Our model can calculate behavioral effects of each such price and thus calculate car choices, miles, and emissions. A nested logit structure is used …

Leakage, Welfare, And Cost-Effectiveness Of Carbon Policy, Kathy Baylis, Don Fullerton, Daniel H. Karney

Don Fullerton

We extend the model of Fullerton et al (2012) to explore cost-effectiveness of unilateral climate policy in the presence of leakage. We ignore the welfare gain from reducing greenhouse gas emissions and focus on the welfare cost of the emissions tax or permit scheme. Whereas that prior paper solves for changes in emissions quantities and finds that leakage maybe negative, we show here that all cases with negative leakage in that model are cases where a unilateral carbon tax results in a welfare loss. With positive leakage, however, a unilateral policy can improve welfare.

Can Pollution Tax Rebates Protect Low-Wage Earners?, Don Fullerton, Holly Monti

Don Fullerton

Pollution taxes are believed to burden low-income households that spend a greater than average share of income on pollution-intensive goods. Some proposals offset that effect by returning revenue to low-income workers via reduced labor tax. We build analytical general equilibrium models with both high-skilled and low-skilled labor, and we solve for the change in real net wage of each group. A decomposition shows the separate effects of the tax rebate, higher product prices, and the changes in relative wage rates. We also include numerical examples. Even though the pollution tax injures both types of labor, in most cases we find …

Introduction, Don Fullerton, Mark Cohen, Robert Topel

Don Fullerton

We introduce and summarize the ten chapters of the 2013 book we edited called "Distributional Aspects of Energy and Climate Policies". In particular, the chapters examine policies that would “price” carbon emissions or otherwise seek to mitigate anthropogenic climate change. We interpret “distributional” fairly broadly, to include impacts of pending or possible legislation on the living standards of households across the U.S. income distribution and across geographic areas, as well as international differences in the costs and benefits of climate policies that would affect countries’ willingness to participate in harmonized international agreements.

Does The Indexing Of Government Transfers Make Carbon Pricing Progressive?, Don Fullerton, Garth Heutel, Gilbert Metcalf

Don Fullerton

We analyze both the uses side and the sources side incidence of domestic climate policy using an analytical general equilibrium model, taking into account the degree of government program indexing. When transfer programs such as Social Security are explicitly indexed to inflation, higher energy prices automatically lead to cost-of-living adjustments for recipients. We show results with no indexing, 100 percent indexing, and partial indexing based on our analysis of actual transfer programs. When households are classified by annual income, the indexing of U.S. transfers is not enough to offset the regressive uses side, but when they are classified by annual …

The Design And Implementation Of U.S. Climate Policy, Don Fullerton, Catherine Wolfram

Don Fullerton

No abstract provided.

Introduction And Summary, Don Fullerton, Catherine Wolfram

Don Fullerton

While economic models have already proven useful to analyze big picture questions about climate policy such as the choice between a carbon tax or cap-and-trade permit system, the 19 chapters in this book show how economic models also are useful to address the many remaining smaller questions that arise as policy is implemented. For example, chapters consider: the tradeoffs policymakers confront in deciding whether to implement the policy upstream on energy producers or downstream on energy users; how to monitor and enforce climate policy; how Federal actions might interact with climate policies at other levels of government or with other …

Six Distributional Effects Of Environmental Policy, Don Fullerton

Don Fullerton

While prior literature has identified various effects of environmental policy, this note uses the example of a proposed carbon permit system to illustrate and discuss six different types of distributional effects: (1) higher prices of carbon-intensive products, (2) changes in relative returns to factors like labor, capital, and resources, (3) allocation of scarcity rents from a restricted number of permits, (4) distribution of the benefits from improvements in environmental quality, (5) temporary effects during the transition, and (6) capitalization of all those effects into prices of land, corporate stock, or house values. The note also discusses whether all six effects …

The General Equilibrium Incidence Of Environmental Mandates, Don Fullerton, Garth Heutel

Don Fullerton

Pollution regulations affect factor demands, relative returns, production, and output prices. In our model, one sector includes pollution as an input that can be a complement or substitute for labor or capital. For each type of mandate, we find conditions where more burden is on labor or on capital. Stricter regulation does not always place less burden on the better substitute for pollution. Also, restrictions on pollution per unit output create an “output-subsidy effect” on factor prices that can reverse the usual output and substitution effects. We find analogous effects for a restriction on pollution per unit capital.

Tax And Subsidy Combinations For The Control Of Car Pollution, Don Fullerton, Sarah West

Don Fullerton

Despite technological advances, an individual car’s emissions still cannot be measured reliably enough to impose a Pigovian tax. This paper explores alternative market incentives that could be used instead. We solve for second-best combinations of uniform taxes on gasoline, engine size, and vehicle age. For 1,261 individuals and cars in the 1994 Consumer Expenditure Survey, we record the car’s model, year, and number of cylinders. We then seek a corresponding car in data from the California Air Resources Board that shows the car’s engine size, fuel efficiency, and emissions per mile. We calculate the welfare improvement from a zero-tax scenario …

Combinations Of Instruments To Achieve Low-Carbon Vehicle-Miles, Don Fullerton, Daniel Karney

Don Fullerton

In cases where the first-best carbon tax and a reasonable second-best gasoline tax are unavailable, this paper demonstrates how alternative combinations of instruments can form economically-sound, environmentally-motivated policies for substantial reductions in vehicle carbon emissions. In order to implement alternative approaches successfully, our point is that policymakers may need to take a holistic approach when designing policy. This holistic approach would recognise that policies to reduce carbon emissions must be politically feasible, and that all sectors of the economy generate carbon emissions. A holistic approach would not focus just on one method of abatement, like encouraging low-carbon vehicle technologies, but …

Analytical General Equilibrium Effects Of Energy Policy On Output And Factor Prices, Don Fullerton, Garth Heutel

Don Fullerton

Using an analytical general equilibrium model, we find solutions for the effect of energy policy on factor prices as well as output prices. We calibrate the model to the U.S. economy, and we consider a tax on carbon dioxide. By looking at expenditure and income patterns across household groups, we quantify the uses-side and sources-side incidence of the tax. When households are categorized either by annual income or by total annual consumption as a proxy for permanent income, the uses-side incidence is regressive. This result is robust to sensitivity analysis over various parameter values. The sources-side incidence can be progressive, …

Environmental Taxes, Don Fullerton, Andrew Leicester, Stephen Smith

Don Fullerton

This paper provides an overview of key economic issues in the use of taxation as an instrument of environmental policy. Part A reviews economic arguments for using taxes and other market mechanisms in environmental policy, discusses the choice between taxes directly on measured emissions or less-directly related to emissions, and considers the value of the revenue from environmental taxes. We argue that environmental tax revenues do not significantly alter economic constraints on tax policy, and that environmental taxes need to be designed and justified primarily by the cost-effective achievement of environmental goals. Part B discusses key areas where environmental taxes …

The Allocation Of Permits In U.S. Climate Change Legislation, Don Fullerton, Daniel Karney

Don Fullerton

Don Fullerton and Daniel Karney of the University of Illinois take a hard look at the allocation of CO2 emissions permits under the Waxman-Markey bill and give it minimally passing marks.

Distributional Effects Of Environmental And Energy Policy: An Introduction, Don Fullerton

Don Fullerton

This chapter reviews literature on the distributional effects of environmental and energy policy. In particular, many effects of such policy are likely regressive. First, it raises the price of fossil-fuel-intensive products, expenditures on which are a high fraction of low-income budgets. Second, if abatement technologies are capital-intensive, then any mandate to abate pollution may induce firms to use more capital. If demand for capital is raised relative to labor, then a lower relative wage may also hurt low-income households. Third, pollution permits handed out to firms bestow scarcity rents on well-off individuals who own those firms. Fourth, low-income individuals may …

Is Social Security Part Of The Social Safety Net?, Jeffrey R. Brown, Julia Lynn Coronado, Don Fullerton

Don Fullerton

Building on the existing literature that examines the extent of redistribution in the Social Security system as a whole, this paper focuses more specifically on how Social Security affects the poor. This question is important because a Social Security program that reduces overall inequality by redistributing from high income individuals to middle income individuals may do nothing to help the poor; conversely, a program that redistributes to the poor may nonetheless be regressive according to broader measures if it also redistributes from middle to upper income households. We have four major findings. First, as we expand the definition of income …

The Distribution Of Tax Burdens: Introduction, Don Fullerton, Gilbert Metcalf

Don Fullerton

This paper summarizes important developments in tax incidence analysis over the past forty years. We mark the date of the beginning of modern tax incidence analysis with the publication of Harberger (1962) and discuss the relation of subsequent work to this seminal paper.

Can Taxes On Cars And On Gasoline Mimic An Unavailable Tax On Emissions, Don Fullerton, Sarah E. West

Don Fullerton

An emissions tax is efficient, but measurement of every car’s emissions would be inaccurate and expensive. With identical consumers, we demonstrate the same efficiency for: an emissions tax; a gas tax that depends on fuel type, engine size, and pollution control equipment (PCE); a vehicle tax that depends on mileage; or a combination of uniform tax rates on gasoline and engine size with a subsidy to PCE. With heterogeneous consumers, efficiency can be obtained by a vehicle-specific gas tax or mileage-specific vehicle tax, but not by flat rates. We characterize second-best uniform tax rates on gasoline and on car characteristics.

Distributional Impacts Of Proposed Changes To The Social Security System, Julia Coronado, Don Fullerton, Thomas Glass

Don Fullerton

In this paper we assess the degree to which the current social security system redistributes income from rich to poor. We then estimate the impact of various proposed changes to social security on the overall redistributive effect of the system. Our analysis takes a steady-state approach in which we assume participants work their entire lives and retire under a given system. Redistribution is measured on a lifetime basis using estimated earnings profiles for a sample of people taken from the PSID. We allow for differential mortality, not only by gender and race, but also by lifetime income. Our results indicate …

Environmental Taxes And The Double-Dividend Hypothesis: Did You Really Expect Something For Nothing?, Don Fullerton, Gilbert Metcalf

Don Fullerton

The "double-dividend hypothesis" suggests that increased taxes on polluting activities can provide two kinds of benefits. The first dividend is an improvement in the environment, and the second dividend is an improvement in economic efficiency from the use of environmental tax revenues to reduce other taxes such as income taxes that distort labor supply and saving decisions. In this paper, we make four main points. First, the validity of the double-dividend hypothesis cannot logically be settled as a general matter. Second, the focus on revenue in this literature is misplaced. We demonstrate that three policies have equivalent impacts on the …

Tax Neutrality And Intangible Capital, Don Fullerton, Andrew Lyon

Don Fullerton

The Tax Reform Act of 1986 (TRA) attempts to "level the playing field" between equipment and other tangible assets by repealing the investment tax credit that was available only for equipment. This change may not increase economic efficiency, however, if there exist substantial amounts of intangible capital. Advertising along with research and development (R & D) are viewed as investments in goodwill and production expertise. As forms of intangible capital, they receive the significant tax advantage of immediate expensing rather than delayed depreciation deductions. This chapter finds that effective tax rates are mismeasured when this investment is ignored. The United …

The Indexation Of Interest, Depreciation, And Capital Gains And Tax Reform In The U.S., Don Fullerton

Don Fullerton

The Treasury's 1984 plan is a more comprehensive income tax, including the indexation of interest, depreciation, and capital gains. The 1985 President's proposal retains some of this indexation. The author measures the incentives under each regime to make marginal investments in the corporate, noncorporate and housing sectors. Inflation causes current effective tax rates to rise for some assets and fall for others. Overall rates fall with inflation, and the corporate tax is completely offset by credits, allowances, and deductions. Under the proposals, the corporate tax reemerges, effective tax rates are much more uniform, and the interference of inflation is virtually …

Uncertain Parameter Values And The Choice Among Policy Options, Don Fullerton, Andrew Lyon

Don Fullerton

We use a tax policy example to show how debate on the value of an elasticity parameter translates into a debate about policy choices. To construct this example, suppose that the choice among four particular tax reform options is based on a single measure of efficiency gain. For each reform, we show how the size of this gain depends upon the elasticity of saving with respect to the net rate of return. Moreover, within quite narrow and reasonable bounds for the elasticity parameter, we find regions in which each of three different tax reforms turns out to dominate the others.

Which Effective Tax Rate?, Don Fullerton

Don Fullerton

No abstract provided.

Replacing The U.S. Income Tax With A Progressive Consumption Tax : A Sequenced General Equilibrium Approach, Don Fullerton, John B. Shoven, John Whalley

Don Fullerton

This paper examines the welfare consequences of changing the current U.S. income tax system to a progressive consumption tax. We compute a sequence of single period equilibria in which savings decisions depend on the expected future return to capital. In the presence of existing income taxes, the U.S. economy is assumed to lie on a balanced growth path. With the change to a consumption tax, individuals save more and initially consume less. As the capital stock grows, consumption eventually overtakes that of the original path, and the economy approaches the new balanced growth path with higher consumption and a greater …

Corporate Tax Integration In The United States: A General Equilibrium Approach, Don Fullerton, A. Thomas King, John B. Shoven, John Whalley

Don Fullerton

This paper presents estimates of static and dynamic general equilibrium resource allocation effects for four alternative plans for corporation and personal income tax integration in the United States. A medium-scale numerical general equilibrium model is used which integrates the U.S. tax system with consumer demand behavior by household and producer behavior by industry.