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Article

The window of opportunity for containing risks of dangerous instability in the global climate system is closing rapidly. The response of the international community is embedded in the 2015 Paris Agreement, signed by 195 parties. Implementing the mitigation pledges parties submitted for the agreement is an important first step, although an additional mechanism to coordinate and scale up mitigation policy at the international level will likely be needed. Carbon taxation, or similar pricing, has a pivotal role, providing across-the-board incentives for reducing emissions and the critical price signal for redirecting investment, but pricing has proved difficult politically. Analytical literature on carbon taxation provides practical guidance on the role of taxation in implementing the Paris Agreement and enhancing its acceptability. Shifting taxes off labor and capital and onto carbon or fossil fuels can produce a “double dividend” by reducing environmental harm and lowering the burden broader taxes impose on the economy. Broader taxes both discourage work effort and investment and promote tax-sheltering behavior (e.g., activity in the informal sector). For various technical and practical reasons, however, it may not make sense to set the carbon tax rate above levels warranted on environmental grounds. The literature emphasizes the general importance of using carbon pricing revenues to benefit the economy, for example, lowering burdensome taxes or funding productive investments. These economic benefits are forgone if instead carbon pricing revenues are given to households in lump-sum dividends. Where higher energy prices are subject to public acceptability constraints, a package of regulations or their fiscal equivalents (known as “feebates”) have an important role in reinforcing carbon pricing. Carbon mitigation can also produce important domestic environmental co-benefits, such as reductions in local air pollution mortality. Unilateral action may be in many countries’ own interests before even counting the global climate benefits. Recent studies have quantified the carbon prices implicit in countries’ Paris mitigation pledges. These implicit prices differ widely across countries with the stringency of pledges and the responsiveness of emissions to pricing, underscoring the potential efficiency gains from some degree of price coordination at the international level. In fact, an international carbon price floor arrangement could be strikingly effective to the extent that it promotes more mitigation in key emerging market economies, such as China and India. The price floor need only cover a handful of large emitters, could be designed equitably with higher requirements for advanced countries, and could be designed flexibly to accommodate different policy approaches at the national level. Domestically, policymakers need to develop comprehensive mitigation strategies, ideally with carbon pricing as the key element. These strategies need to distribute burdens equitably, assist vulnerable groups, and include supporting measures for investment and pricing for broader sources of greenhouse gases.

Article

Urban sprawl in popular sources is vaguely defined and largely misunderstood, having acquired a pejorative meaning. Economists should ask whether particular patterns of urban land use are an outcome of an efficient allocation of resources. Theoretical economic modeling has been used to show that more not less, sprawl often improves economic efficiency. More sprawl can cause a reduction in traffic congestion. Job suburbanization can generally increase sprawl but improves economic efficiency. Limiting sprawl in some cities by direct control of the land use can increase sprawl in other cities, and aggregate sprawl in all cities combined can increase. That urban population growth causes more urban sprawl is verified by empirically implemented general equilibrium models, but—contrary to common belief—the increase in travel times that accompanies such sprawl are very modest. Urban growth boundaries to limit urban sprawl cause large deadweight losses by raising land prices and should be seen to be socially intolerable but often are not. It is good policy to use corrective taxation for negative externalities such as traffic congestion and to implement property tax reforms to reduce or eliminate distortive taxation. Under various circumstances such fiscal measures improve welfare by increasing urban sprawl. The flight of the rich from American central cities, large lot zoning in the suburbs, and the financing of schools by property tax revenues are seen as causes of sprawl. There is also evidence that more heterogeneity among consumers and more unequal income distributions cause more urban sprawl. The connections between agglomeration economies and urban sprawl are less clear. The emerging technology of autonomous vehicles can have major implications for the future of urban spatial structure and is likely to add to sprawl.

Article

The interaction between poverty and social policy is an issue of longstanding interest in academic and policy circles. There are active debates on how to measure poverty, including where to draw the threshold determining whether a family is deemed to be living in poverty and how to measure resources available. These decisions have profound impacts on our understanding of the anti-poverty effectiveness of social welfare programs. In the context of the United States, focusing solely on cash income transfers shows little progress against poverty over the past 50 years, but substantive gains are obtained if the resource concept is expanded to include in-kind transfers and refundable tax credits. Beyond poverty, the research literature has examined the effects of social welfare policy on a host of outcomes such as labor supply, consumption, health, wealth, fertility, and marriage. Most of this work finds the disincentive effects of welfare programs on work, saving, and family structure to be small, but the income and consumption smoothing benefits to be sizable, and some recent work has found positive long-term effects of transfer programs on the health and education of children. More research is needed, however, on how to measure poverty, especially in the face of deteriorating quality of household surveys, on the long-term consequences of transfer programs, and on alternative designs of the welfare state.

Article

Hengjie Ai, Murray Z. Frank, and Ali Sanati

The trade-off theory of capital structure says that corporate leverage is determined by balancing the tax-saving benefits of debt against dead-weight costs of bankruptcy. The theory was developed in the early 1970s and despite a number of important challenges, it remains the dominant theory of corporate capital structure. The theory predicts that corporate debt will increase in the risk-free interest rate and if the tax code allows more generous interest rate tax deductions. Debt is decreasing in the deadweight losses in a bankruptcy. The equilibrium price of debt is decreasing in the tax benefits and increasing in the risk-free interest rate. Dynamic trade-off models can be broadly divided into two categories: models that build capital structure into a real options framework with exogenous investments and models with endogeneous investment. These models are relatively flexible, and are generally able to match a range of firm decisions and features of the data, which include the typical leverage ratios of real firms and related data moments. The literature has essentially resolved empirical challenges to the theory based on the low leverage puzzle, profits-leverage puzzle, and speed of target adjustment. As predicted, interest rates and market conditions matter for leverage. There is some evidence of the predicted tax rate and bankruptcy code effects, but it remains challenging to establish tight causal links. Overall, the theory provides a reasonable basis on which to build understanding of capital structure.

Article

The rise in obesity and other food-related chronic diseases has prompted public-health officials of local communities, national governments, and international institutions to pay attention to the regulation of food supply and consumer behavior. A wide range of policy interventions has been proposed and tested since the early 21st century in various countries. The most prominent are food taxation, health education, nutritional labeling, behavioral interventions at point-of-decision, advertising, and regulations of food quality and trade. While the standard neoclassical approach to consumer rationality provides limited arguments in favor of public regulations, the recent development of behavioral economics research extends the scope of regulation to many marketing practices of the food industry. In addition, behavioral economics provides arguments in favor of taxation, easy-to-use front-of-pack labels, and the use of nudges for altering consumer choices. A selective but careful review of the empirical literature on taxation, labeling, and nudges suggests that a policy mixing these tools may produce some health benefits. More specifically, soft-drink taxation, front-of-pack labeling policies, regulations of marketing practices, and eating nudges based on affect or behavior manipulations are often effective methods for reducing unhealthy eating. The economic research faces important challenges. First, the lack of a proper control group and exogenous sources of variations in policy variables make evaluation very difficult. Identification is challenging as well, with data covering short time periods over which markets are observed around slowly moving equilibria. In addition, truly exogenous supply or demand shocks are rare events. Second, structural models of consumer choices cannot provide accurate assessment of the welfare benefits of public policies because they consider perfectly rational agents and often ignore the dynamic aspects of food decisions, especially consumer concerns over health. Being able to obtain better welfare evaluation of policies is a priority. Third, there is a lack of research on the food industry response to public policies. Some studies implement empirical industrial organization models to infer the industry strategic reactions from market data. A fruitful avenue is to extend this approach to analyze other key dimensions of industrial strategies, especially decisions regarding the nutritional quality of food. Finally, the implementation of nutritional policies yields systemic consequences that may be underestimated. They give rise to conflicts between public health and trade objectives and alter the business models of the food sector. This may greatly limit the external validity of ex-ante empirical approaches. Future works may benefit from household-, firm-, and product-level data collected in rapidly developing economies where food markets are characterized by rapid transitions, the supply is often more volatile, and exogenous shocks occur more frequently.

Article

Alexandrina Stoyanova and David Cantarero-Prieto

Long-term care (LTC) systems entitle frail and disabled people, who experience declines in physical and mental capacities, to quality care and support from an appropriately trained workforce and aim to preserve individual health and promote personal well-being for people of all ages. Myriad social factors pose significant challenges to LTC services and systems worldwide. Leading among these factors is the aging population—that is, the growing proportion of older people, the main recipients of LTC, in the population—and the implications not only for the health and social protection sectors, but almost all other segments of society. The number of elderly citizens has increased significantly in recent years in most countries and regions, and the pace of that growth is expected to accelerate in the forthcoming decades. The rapid demographic evolution has been accompanied by substantial social changes that have modified the traditional pattern of delivery LTC. Although families (and friends) still provide most of the help and care to relatives with functional limitations, changes in the population structure, such as weakened family ties, increased participation of women in the labor market, and withdrawal of early retirement policies, have resulted in a decrease in the provision of informal care. Thus, the growing demands for care, together with a lower potential supply of informal care, is likely to put pressure on the provision of formal care services in terms of both quantity and quality. Other related concerns include the sustainable financing of LTC services, which has declined significantly in recent years, and the pursuit of equity. The current institutional background regarding LTC differs substantially across countries, but they all face similar challenges. Addressing these challenges requires a comprehensive approach that allows for the adoption of the “right” mix of policies between those aiming at informal care and those focusing on the provision and financing of formal LTC services.

Article

Diane McIntyre, Amarech G. Obse, Edwine W. Barasa, and John E. Ataguba

Within the context of the Sustainable Development Goals, it is important to critically review research on healthcare financing in sub-Saharan Africa (SSA) from the perspective of the universal health coverage (UHC) goals of financial protection and access to quality health services for all. There is a concerning reliance on direct out-of-pocket payments in many SSA countries, accounting for an average of 36% of current health expenditure compared to only 22% in the rest of the world. Contributions to health insurance schemes, whether voluntary or mandatory, contribute a small share of current health expenditure. While domestic mandatory prepayment mechanisms (tax and mandatory insurance) is the next largest category of healthcare financing in SSA (35%), a relatively large share of funding in SSA (14% compared to <1% in the rest of the world) is attributable to, sometimes unstable, external funding sources. There is a growing recognition of the need to reduce out-of-pocket payments and increase domestic mandatory prepayment financing to move towards UHC. Many SSA countries have declared a preference for achieving this through contributory health insurance schemes, particularly for formal sector workers, with service entitlements tied to contributions. Policy debates about whether a contributory approach is the most efficient, equitable and sustainable means of financing progress to UHC are emotive and infused with “conventional wisdom.” A range of research questions must be addressed to provide a more comprehensive empirical evidence base for these debates and to support progress to UHC.