Gasoline Taxes and Externalities

Transcription

1 Gasoline Taxes and Externalities - Parry and Small (2005) derive second-best gasoline tax, disaggregated into components reflecting external costs of congestion, accidents and air pollution - also calculate Ramsey tax component reflecting balance between excise and labor taxes in financing government budget - static, closed economy, with utility function of representative agent, all variables expressed in per capita terms: U = u [ ( C, M, T, G), N ] - ϕ( P) - ( A ) (1) - C is numeraire consumption good, M is vehicle miles of travel, T is time spent driving, G is government spending, N is leisure, P is local/global pollution, and A is severity-adjusted accidents - u(.), (.) are quasi-concave, whereas ϕ(.), δ (.)are weakly convex representing disutility from pollution

2 - travel produced by homogeneous function: M = M(, H ) (2) - where is fuel consumption, and H is monetary measure of other driving costs that depend on vehicle-price/type - allows for non-proportional relation between gasoline consumption and vehicle miles traveled (VMT) with higher gas taxes, agents drive less (reduce M), but pay for improved fuel economy (substitution from to H) - driving time is determined as: T = ( M ) M (3) - where is inverse of average travel speed, and M is aggregate miles driven/capita increase in VMT leads to more congested roads, so > 0, and agents take as fixed - pollutants are carbon dioxide P which is proportional to fuel use, and local pollutants, hydrocarbons, carbon monoxide, P M which are proportional to miles driven:

3 P = P ( ) + P ( M ) (4) M - where P, PM > 0 and is aggregate fuel consumption/capita - ( A ) represents expected disutility from external costs of accidents, which vary with aggregate amount of driving: A = a( M ) M (5) - where a( M ) is the average external cost per mile, but sign of a is ambiguous heavier traffic results in more but less severe accidents - firms are competitive, producing all goods with labor that has a constant marginal product; all prices are fixed and normalized, except gasoline, which is denoted as q - government expenditure financed by a gasoline tax t and a tax on labor t, the budget constraint being: t + t = G (6)

4 - higher gasoline taxes finance labor tax reductions; externalities not directly taxed/regulated - agent s budget constraint is: C + ( q + t ) + H = I = (1 - t ) (7) - where I is disposable income, and q +t is the consumer price of gasoline - agents are also subject to a time constraint on labor, leisure and driving: + N + T = (8) - utility is maximized with respect to the gasoline tax, accounting for changes in the labor tax, for induced changes in gasoline, VMT, and labor supply, and for utility effects from changes in externalities - full derivation based on Parry and Small (2004), is given as:

5 Pigovian Ramsey C * MEC (1 - MI ) t( q + t ) t = MEB 1 - t Congestion M C C t + E { - (1 - MI ) } 1 - t (9a) - where: P C A PM MEC E + ( E + E + E ) M/ MEB η β η M t t t 1 - t = t + t 1 - t 1 - t P PM E = ϕ P / ; E = ϕ P / ; M C A E = υ M; E = δ A / λ ; υ = 1 - t ut / λ (9b)

6 - where MI is the income elasticity of demand for VMT; is the own-price elasticity of demand for gasoline; is the elasticity of VMT to M C price of gasoline; and are the uncompensated and compensated labor supply elasticities; is the marginal utility of income, and is the value of travel time - marginal external cost of fuel use, MEC, is equal to the marginal damage from carbon P C emissions E, plus marginal congestion E, A M accident E and local pollution costs E P, the latter expressed per mile, and multiplied by miles per gallon M/, and by the fraction of the gasoline demand elasticity due to reduced VMT - if fuel efficiency were fixed, VMT would change in proportion to fuel use, i.e., M =, and =1 but empirical analysis shows that <0.5, reducing the mileage-related externality benefits per gallon of reduced fuel consumption - * t differs from MEC due to three effects arising from interactions in the tax system:

7 (i) (ii) (iii) MEC is divided by 1 + MEB, where MEBis the marginal excess burden of labor taxation, i.e., gas taxes have a narrower base than labor taxes, so they are less efficient at raising revenue There is a Ramsey-tax component this is a force for taxing gasoline at a higher rate than other consumption, provided travel is a relatively weak substitute for leisure There is a positive feedback effect of reduced congestion on labor supply, i.e., less congestion means a reallocation of time to leisure/labor supply which is welfare-improving due to labor taxes - uel economy, M/, is chosen by the consumer, and of course depends on the gasoline tax, approximated by: 0 M M q + t = q + t 0 0 -( - ) M (10)

8 - all elasticities are assumed constant, and (6), * (9), and (10) are then solved for t, and other variables, given values for various parameters - model can also be used to simulate a VMT tax, i.e., a tax on travel distance denominated in cents/mile, where travel changes exactly in proportion to fuel use - specifically, M =, and = 1, and M is set equal to same value as used in fuel-tax calculations, and holding fuel efficiency constant - VMT tax has a greater effect on reducing externalities, and as is smaller due to fewer substitution possibilities, so revenue effects of VMT tax are more efficient - also results in larger Pigovian and Ramsey tax components in (9a) - Table 1 reports results of calculating optimal gasoline tax in US and UK, i.e., $1.01 and $1.34/gallon respectively these compare to naïve taxes of $1.76 and $3.48/gallon respectively ( = 1, and fiscal interactions ignored)

9 - Table 3, reports results for an optimal VMT tax, with rates being much higher than a gas tax at $2.48 and $3.00/gallon equivalent