Time Inconsistency in Environmental Policy: Tax Earmarking as a Commitment Solution
Date
01.01.1999
01.01.1999
Authors
Laura Marsiliani, Thomas I. Renström
JEL Code
D62,D72,E62,H20
D62,D72,E62,H20
Keywords:
Tax earmarking,fiscal policy,redistributive taxation,endogenous taxation,time inconsistency,environmental tax,pollution abatement
Tax earmarking,fiscal policy,redistributive taxation,endogenous taxation,time inconsistency,environmental tax,pollution abatement
Publisher
Climate Change and Sustainable Development
Climate Change and Sustainable Development
Editor
Carlo Carraro
Carlo Carraro
JOURNAL
Vol. 110
Vol. 110
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.