Fiscal policy and climate change

It becomes more and more difficult to deny that something is happening to the weather and that climate change is a reality. From the point of view of the economist, this implies that there is more scope for distortionary taxation to mitigate climate change, and this brings a series of opportunities to improve the economy in indirect ways. The big fear of business is that sin taxes on pollution will curtail their production and profits. Of course, this is the whole point of these taxes, that is to internalize the effect of pollution, and that often means either reducing production or increasing production costs.

But as Benjamin Jones, Michael Keen and Jon Strand point out, this has also important benefits for businesses: the added tax revenue allows to reduce other taxes, in particular the ones that are bad for business: corporate taxes or income taxes could even be eliminated in a so-called greening of the tax code. This is one important reason one should tax polluting production or energy instead of subsidizing energy-efficient production or alternative energy, as I have already repeated at great lengths on this blog. But this is easier said than done, as the public will surely call for public expenses to cope with climate change. Politically, it is much easier to give firms technology to pollute less than have them buy it because polluting alternatives have become too expensive. But because it is easier politically does not mean it is right.

Tax rates over the business cycle

With all the talk about cyclical austerity measures, it is surprising that little is known about the cyclical behavior of tax rates. For one, the tax code is complex and it cannot be summarized by a single number. That can be done by looking at aggregates, but of course aggregate tax rates are endogenous to economic activity as soon as there is some progressivity.

This does not deter Carlos Vegh and Guillermo Vuletin who analyze various tax rates for 62 countries over 40 years, using top marginal rates for corporate and personal incomes, as well as VAT. The results are striking: there is no correlation of tax rates with the business cycle in developed economies, but they are noticeably procyclical in developing ones. Why would this be the case? A simple model can explain this. Public consumption is always procyclical, for example if private and public consumption are complements. If public consumption is a large share of national income, tax rates need to go up to sustain increased expenses in a boom. If the public consumption share is rather small, as is typically the case in developed economies, tax increases are not required.

Being landlocked and making it worse

No matter how you specify your growth regression, it always turns out that being landlocked is bad for a country. The lack of direct access to the sea and thus world markets seems to hurt the capacity to specialize for exports and acquire cheap imports. As a consequence, it stands to reason that any landlocked country should try to circumvent this physical hurdle by creating institutions that foster trade, say by joining free-trade agreements.

Well, the reality seems to be the exact opposite. Ingo Borchert, Batshur Gootiiz, Arti Grover and Aaditya Mattoo find that landlocked economies in general have more restrictive policies in anything that relates to trade and interacting with the rest of the world, such as telecommunications and transportation. And with such policies, international policy assistance is unlikely to have much impact. But one make also ask oneself whether landlocked countries naturally tend to shun the rest to the world, an attitude that is difficult to overcome.

How to fight corruption

Conventional wisdom tells us corruption is bad (except for a few people). The evidence is surprisingly mixed (see old post), but that has not deterred every government or international agency to at least pretend to do something about it. Eradicating or attenuating corruption rarely works, maybe it is because the approach is wrong.

Martin Dufwenberg and Giancarlo Spagnolo verify an innovative angle to attack bribing, as proposed by Kaushik Basu and widely discussed in the Indian press: make bribing legal, but levy heavy fines on accepting bribes. That is somehow similar to the situation in some countries where consuming some drugs is legal, but their commerce is not. The conundrum the proposal tries to resolve is that briber and bribe-taker are usually partners in crime and unlikely to report the activity. By guaranteeing immunity to one party with return of the bribe, it is more likely that the corruptive transaction will be reported. But it turns out to optimize it, immunity should only be granted to those who report a bribe. Indeed, this gives stronger incentives to report. Also, granting immunity to any briber would have made it morally acceptable to bribe. To this I would have added that one also offer the repented briber a commission on top of the returned bribe. Then it would become profitable to report bribes, even when the requested service is ultimately not provided.

The deadweight loss of gift certificates

Giving gifts in kind induces large deadweight losses, as I discussed in one of my very first blog posts. The basic idea is that people do not value their gifts as much as they would be willing to spend on, or at least that they would have spent the cost of the gift in a Pareto-improving way. If instead of receiving a gift in kind one obtains a gift card, the added flexibility should give us a small to negligible deadweight loss. I would compare this to an incomplete market that can get close to complete, in well-being, with very few securities like government bonds.

Flóra Felsö and Adriaan Soetevent study spending habits of gift certificate recipients. They find that the vast majority is not really constrained by having to buy at a particular merchant and only alter a little bit the timing of their purchases. One in seven (more among females), though, considers the gift certificate separately from the budget constraint and buys something one could not afford. While these people are happy about it, there is obviously still a loss in well-being. Indeed, if they want this purchase so much, they would have bought it from the "normal" funds. All in all, the deadweight loss from gift certificates does not seem important.

Obese self-discriminators

Minorities, ugly, fat and "different" people are discriminated against, there is no question about it. It is very unfortunate, and laws (and education) try to correct this. Unfortunately, those that are discriminated may not be helping their cause by not doing enough to promote themselves.
think if it like they conceded defeat against discrimination.

What is the evidence? Pablo Brañas-Garza & Antonios Proestakis ran some experiments where people were supposed to declare how much they feel they should be compensated to fill the experiment questionnaire. It turns out that obese people were asking significantly less frequently (-5%) for money, and when they ask for some they ask for much less (-20%). What is most important here is that they self-diagnose themselves as obese, less whether they actually. Seeing this, my first reaction was that they ask for less because their opportunity cost is lower, as they do earn less. But the authors take account of the wage. So it must be that obese have such low self-esteem that they cannot be ambitious in what they ask for.

Egoistic giving

Why do people give to charity? It could be because they care about others. It could be for tax reasons. It could be to offload some guilt. It could be to improve one's standing in society. It could be to encourage others to do the same. Or it could be a combination of all the above. In a more fundamental way, the question is whether philanthropy is egoistic or altruistic.

To address this, Dean Karlan and Margaret McConnell examines donors to Yale University. During a telephone campaign, some potential donors were told about the opportunity of being recognized as donor in the college's newsletter. They responded by giving more frequently (+3%) and more (+14%) than the control group. Variations in the amount necessary to be listed did not yield significant effects, though. One can conclude from this that people donate at least in part to elevate their status and/or to encourage others to give.

To disentangle to two, Karlan and McConnell use a better controlled environment, the laboratory. They work with undergraduates to see whether the latter are willing to part with US$5 to help fight AIDS, tuberculosis and malaria. In some rounds, donors are announced, but no difference in giving is noticed by varying the timing of the announcements. One can thus conclude that giving to encourage others to give is not an important factor, even with such small amounts.