Time Inconsistency in Environmental Policy: Tax Earmarking as a Commitment Solution
AbstractTax 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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Bibliographic InfoPaper provided by Department of Economics, University of Birmingham in its series Discussion Papers with number 99-22.
Length: 23 pages
Date of creation: 1999
Date of revision:
FISCAL POLICY ; TAXATION ; SOCIAL CHOICE ; ENVIRONMENT;
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