Payroll Tax Reduction Research Articles

Efficiency and Sectoral Distributional Impacts of Output-Based Emissions Allowances in Canada

Abstract Emissions trading with output-based allocation (OBA) of emissions allowances is gaining popularity as a mean to address sectoral distribution issues related to the use of market-based instruments in pollution control. Using a dynamic general equilibrium framework, this paper assesses the potential trade-off between efficiency and uneven sectoral distributional effects. It compares OBA and other alternative emissions trading systems, with special attention to the heterogeneity among energy-intensive industries. Because abatement is achieved at a higher marginal cost with OBA, it is less efficient than emissions trading systems in which permit revenues are used to reduce payroll taxes. Nonetheless, the implicit output subsidy in OBA improves the sectoral distributional outcome of the abatement policy to the benefit of energy-intensive industries as a whole. The simulation results also suggest that energy-intensive industries that do not produce energy are the main beneficiaries of OBA. In the new carbon-constrained environment, energy intensive industries that produce energy could not benefit from OBA.

Efficiency and Sectoral Distributional Impacts of Output-Based Emissions Allowances in Canada

Emissions trading with output-based allocation (OBA) of emissions allowances is gaining popularity as a mean to address sectoral distribution issues related to the use of market-based instruments in pollution control. Using a dynamic general equilibrium framework, this paper assesses the potential trade-off between efficiency and uneven sectoral distributional effects. It compares OBA and other alternative emissions trading systems, with special attention to the heterogeneity among energy-intensive industries. Because abatement is achieved at a higher marginal cost with OBA, it is less efficient than emissions trading systems in which permit revenues are used to reduce payroll taxes. Nonetheless, the implicit output subsidy in OBA improves the sectoral distributional outcome of the abatement policy to the benefit of energy-intensive industries as a whole. The simulation results also suggest that energy-intensive industries that do not produce energy are the main beneficiaries of OBA. In the new carbon-constrained environment, energy intensive industries that produce energy could not benefit from OBA.

Can a Carbon Permit System Reduce Spanish Unemployment?

This paper analyses whether recycling revenues from carbon emission permit auctions can reduce unemployment in the Spanish economy. Spain's deviation from EU's intermediate emission goals is more serious than for most other EU countries, and the unemployment is also well above the EU average. We use a CGE model that includes a matching model with two types of labour, and which allows for different pricing rules and returns-to-scale assumptions. We find that abatement reduces unemployment due to beneficial impacts of recycling the revenue from permit sales. Unemployment is more effectively abated when revenues are used to reduce labour taxes rather than indirect taxes. Contrary to other studies of Europe, we find that the best option is to reduce payroll taxes on skilled labour. This reform is the most successful both in increasing demand and in dampening the supply response to rising wages. All the recycling schemes also generate dividends in terms of welfare, but none offset the abatement costs entirely.

Funding a PAYG pension system: the case of Italy

AbstractItaly is characterised by a mature pay‐as‐you‐go social security system and by particularly adverse population projections. Given these trends, the social security contribution rate is expected to increase above its current high level. This hinders the development of employer‐provided pension funds and introduces a significant wedge between labour cost and earnings that discourages both labour demand and labour supply. Any proposal to reduce payroll taxes and to reform the system in the direction of partial funding has to cope with the state of Italian public finances. Italy has to comply with the Stability and Growth Pact that imposes constraints on budget deficit and debt trends. Using micro data from the Bank of Italy's Survey of Household Income and Wealth and official population projections, we estimate future employment trends under different demographic and macroeconomic scenarios and compute the cost of the transition. We show that it would be substantially reduced if positive effects on employment were induced by the payroll tax reduction.

Environmental tax reform: does it work? A survey of the empirical evidence

Environmental tax reform is the process of shifting the tax burden from employment, income and investment, to pollution, resource depletion and waste. Can environmental tax reform produce a double dividend — help the environment without hurting the economy? This paper reviews the practical experience and available modeling studies. It concludes that when environmental tax revenues are used to reduce payroll taxes, and if wage-price inflation is prevented, significant reductions in pollution, small gains in employment, and marginal gains or losses in production are likely in the short to medium term, while investments fall back and prices increase. Results are less certain in the long term. They might be more positive if models selected welfare instead of production indicators for the second dividend, and if several important variables, such as wage rigidities and the feedback of environmental quality on production, were factored into simulations.

Economic reforms and labour markets: policy issues and lessons from Chile

Chilean lessons Labour markets reforms Over the last twenty years sweeping reforms have deeply transformed the labour market in Chile. A visible outcome has been the reduction of Chile’s rate of unemployment from ‘European’ to ‘US’ levels. Even though the political context makes this experiment special, are there economic lessons to be learnt? This paper concentrates on reforms to job security, on the decentralization of the wage bargaining process, and on the reduction in payroll taxes. It concludes that the reduction of payroll taxes (within the context of the social security reform), and the decentralization of bargaining increased labour market flexibility and contributed to the reduction of unemployment. On the other side, the analysis suggests that the reform on job security had no significant effect on the aggregate rate of unemployment. — Sebastian Edwards and Alejandra Cox Edwards