Using energy taxes to dampen energy price fluctuations

Oil price fluctuations seem to preoccupy people less these days, maybe because they got used to higher prices or because other issues are hotter now. But remember how popular it was to call for the government, whatever the county, to reduce fuel taxes to ease the burden. Which bears the question whether this would be a good idea if you think harder about it.

Helmuth Cremer, Firouz Gahvari, and Norbert Ladoux did so and come to the conclusion that the fuel taxes should not move as much as the energy price. The reason is that the Pigovian motivation for imposing them, internalizing the externalities, has not changed, which would call for perfect smoothing. But this is to an important extend compensated by redistribution considerations as goods using energy are used by people of different incomes. In the end, a doubling of pre-tax energy prices lead to a post-tax increase of 64%. But that is only assuming that the tax was optimal to start with. In many countries it is currently much too low, thus the argument about reducing the tax in high price times is largely invalid, In fact, one should take advantage of reduction in world energy prices to increase the taxes, which would raise much needed money.

Is this what Republicans are really about?

Europeans have struggled for some time to understand the philosophy of the US Republican party, and especially how it manages to get such popular support in the electorate. On the surface, indeed, it all appears to be a platform that favors the rich at the expense of the more numerous poor, the latter having been indoctrinated for many years that governments are bad and, at the extreme, robber barons are better than a benevolent government. The consequence is a drive to increase inequalities in income and wealth.

John Roemer offers a glimpse into the American ideology for inequality. He says that "American philosophy" sees inequality as ethical, as it gives everyone what nature endows him with. That seems like a very fatalist argument (as in some religions) that ignores that redistribution is about the ex-post insurance of where someone is born. having the luck to be born in a good family and in a good country ought to be taxed to some degree to benefit the unlucky. A second argument is the old trickle-down one: if the most talented can keep all the fruits of their labor, they will work more (never mind decreasing marginal utility of consumption and how redistribution can improve global well-being). The third argument is that the government is good at nothing, and should thus be largely absent.

All these arguments are largely shared in the United States, and especially among Republicans. In fact, the latter are now going much farther in reversing redistribution than ever before. Just see how they they are vehemently opposed to any risk sharing through public health insurance, how they limit school funding and public goods in general. In fact, I am starting to wonder whether the hidden goal is to create a new underclass that would be in some ways reminiscent of the old slavery days. That would be consistent with the opposition to minimum wages, with the large prison population, and with keeping the poor uneducated. That would also be coherent with the Republicans willingness to increase the payroll tax (a flat tax applicable to everyone) while calling for a reduction in the income tax (a progressive tax). I hope I am wrong, though.

Who spent the 2001 Bush tax rebate?

Do tax rebate such as those implemented at various times by the Bush II administration work? Measuring this is not obvious. Previous studies have typically exploited the timing of the receipt of the rebate checks to see how expenses have changed. But most people have anticipated these payments, thus the marginal propensity to consume is mismeasured: it measures the propensity to consume due to short-term liquidity considerations beyond the consumption response from the announcement of the program.

Greg Kaplan and Giovanni Violante go a step further in this analysis and build a model that replicates the measurements found in the literature and the large share of hand-to-mouth households using an economy of liquid and illiquid assets with transaction costs. They define hand-to-mouth households as those who hold less that half their periodic pay in liquid assets. That seems very shaky to measure, as the timing of the relevant survey matters a lot here. But assuming there is no systematic error, they then extrapolate through the model what the response from the announcement of the rebate should have been. This adds 7-8% to the marginal propensity to consume. Interestingly, this come in large part form rich household who have only little liquid wealth because their assets are mostly in real estate and retirements funds. An important consequence of this is that larger tax rebates would have little impact, as they would make it more interesting to bear the costs of putting them into illiquid wealth. In fact, the marginal propensity to consume could even turn negative.

Tax reform: Politics has more weight than Economics

One of the great frustration as an economist is to know what is best and being told it is "politically unfeasible." And why is it typically unfeasible? Because the "right" people do not like it, because it sounds complicated, and because populists would have a feast opposing it, or a combination of the three. How much is this frustration really justified?



Micael Castanheira, Gaëtan Nicodème and Paola Profeta look at the reform of labor income taxation in Europe and find that it is very consistent with the theory that politics shapes taxes more than economists. Indeed, the size of the ruling party or coalition is the main factor: instead of a compromise, which would likely be close to the outcome a social planner to choose, the rulers select what is best for them without regard for the others, or just enough regard to prevent a revolt (that is my interpretation). And then people blame economists when things do not go right.



I'll go weep in a corner now.

How to tax addictions

Addiction is most often a problem of self-control. If one is not capable of factoring in the future consequences of one's actions, one way to make this is taken into account is to distort prices appropriately. This is what taxes (and subsidies) are good at. While we know rather well how to design taxes on externalities born by others or the community, the case is more difficult for externalities inflicted on future selves.



Luca Bossi, Paul Calcott and Vladimir Petkov get on the case i the context of externalities, self-control issues and imperfect competition, as applicable for cigarettes and their highly concentrated industry. They also implement time-consistent taxes to accommodate the addiction, which means that people or government would not want to deviate from the social optimum. Taxes are thus state dependent and described by a rule. One important result is that combining addiction and imperfect competition leads to lower taxes that previously reported, because prices are already higher to start with if providers are oligopolistic. Were some drugs to be legalized, one has thus to keep in mind that the new market structure matters in the design of the new taxes.