FEEM working papers "Note di lavoro" series
1999 .076

Time Inconsistency in Environmental Policy: Tax Earmarking as a Commitment Solution


Authors: Laura Marsiliani, Thomas I. Renström
Series: Climate Change and Sustainable Development
Editor: Carlo Carraro
Type: Journal
Keywords: Tax earmarking,fiscal policy,redistributive taxation,endogenous taxation,time inconsistency,environmental tax,pollution abatement
JEL n.: D62,D72,E62,H20
JEL: Economic Journal
Published in: Vol. 110
Date: 2000

Abstract

Tax earmarking imposes a constraint on government policymaking, and may be desirable if it solves a time-inconsistency problem in tax policy. In a two-period economy, in which the policy decisions regarding taxes, public goods provision, and pollution abatement are taken by a majority-elected individual, we show how the time-inconsistency problem in environmental policy arises. We demonstrate that the commitment equilibrium under no earmarking rules cannot be as fully implemented as a no-commitment equilibrium under earmarking rules. However, the earmarking rules do act as a partial commitment mechanism.

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