Measuring the Social Discount Rate under Uncertainty: A Methodology and Application

It is well recognised that the issue of the social rate of discount applies only to the gains from public investment that accrues to the public sector. When it comes to measurement, however, there is a problem: public investment in infrastructure and the like do not usually yield direct pecuniary returns to the public exchequer. Instead public capital may be plausibly argued to lead to increases in factor productivity in the private economy. This paper observes that government typically shares in the latter gains via the collection of tax revenues. Hence to the extent the risk discount rate should reflect the co-variability between the return from public investment and that of the market, we are led to measuring the risk premium implicit in various revenue flows. We apply the above methodology to the United States budget data for the period, 1950-2000, and show that the social risk premium is relatively small vis-à-vis the market. Consequently, the use of the risk free rate as the correct risk discount rate for public sector investment would involve only a minor error. The intuition here is that the portfolio of assets embedded in the state’s revenue claims provides additional diversification than is available through financial markets. Therefore, even investors holding well-diversified stock portfolios may legitimately view claims on state revenue as vehicles for further risk shifting.public discount rate, risk premium, aggregate risks, correlated risks, public investment

The Efficiency Loss of Capital Income Taxation under Imperfect Loss Offset Provisions

The importance of capital loss offset provisions in a world of risk is well documented in the tax literature. However, the potential deadweight losses owing to imperfect offset has not been fully explored. This paper develops a framework whereby that investigation can be carried out and utilizes numerical simulations to investigate the size of potential losses. Results show that when the government and private sector are equally efficient in handling market risk, welfare losses owing to the absence of offset provisions could be substantial. Under plausible assumptions about attitudes towards risk and time preference, and with a capital income tax rate of forty percent, over sixty cents per dollar of tax revenue raised would be dissipated. In contrast, full loss offset would reduce that loss to approximately fourteen cents.capital income taxation, uncertainty, deadweight loss, loss offset provisions

Uncertainty and the Double Dividend Hypothesis

This paper examines the double dividend hypothesis in the presence of labour income uncertainty. Empirical evidence shows that uncertainty over labour income is particularly significant in developing, while not negligible in developed countries. Under uncertainty, and assuming incomplete capital markets, the tax system plays a role in providing social insurance and a green tax reform influences its effectiveness. We show that the increase in environmental tax reduces consumption risk while the balanced budget decrease in labour income tax increases income risk. We find that the total welfare effect of a green tax reform differs substantially from the case of certainty. The critical parameters determining the existence of a second dividend are the lump sum transfers, the relative substitutability of the two goods for leisure and the initial tax rates relative to their optimal that determine also the response of labour supply to a change in the tax mix.Double Dividend Hypothesis, Environmental Taxation, Labor Income Taxation, Uncertainty, Tax Incidence Analysis

Measuring the Social Discount Rate under Uncertainty: A Methodology and Application

It is well recognised that the issue of the social rate of discount applies only to the gains from public investment that accrues to the public sector. When it comes to measurement, however, there is a problem: public investment in infrastructure and the like do not usually yield direct pecuniary returns to the public exchequer. Instead public capital may be plausibly argued to lead to increases in factor productivity in the private economy. This paper observes that government typically shares in the latter gains via the collection of tax revenues. Hence to the extent the risk discount rate should reflect the co-variability between the return from public investment and that of the market, we are led to measuring the risk premium implicit in various revenue flows. We apply the above methodology to the United States budget data for the period, 1950-2000, and show that the social risk premium is relatively small vis-à-vis the market. Consequently, the use of the risk free rate as the correct risk discount rate for public sector investment would involve only a minor error. The intuition here is that the portfolio of assets embedded in the state's revenue claims provides additional diversification than is available through financial markets. Therefore, even investors holding well-diversified stock portfolios may legitimately view claims on state revenue as vehicles for further risk shifting

Choice of Tax Base Revisited: Cash Flow vs. Prepayment Approaches to Consumption Taxation

This paper re-examines the issues involved in the design of a direct tax on consumption, an idea that has received a fair degree of acceptance in the transition countries over the past decade (e.g., tax reforms in Croatia and Moldova). First we argue that on the subject of equivalence among a set of taxes, the only meaningful comparison is along the ex-ante concept of equivalence, and not ex-post. The latter as we shall see requires highly implausible, and often arbitrary, choice scenarios. We carry out the analysis in a variety of models starting with the two-period consumption-saving choice under full certainty. However, a good part of the discussion is carried out where the portfolio choice behaviour is embedded in an intertemporal savings model that has been widely discussed in the literature. We then take up more complete (and necessarily more complex) choice situations for examination. Indeed the first of two variations of the above is a model where individuals make work-leisure (for a given skill level) as well as the safe-risky asset choice. The last is of risky human capital choice, where the physical investment is restricted to a single non-risky asset. For the purposes of the paper, the models are very general, and the precise choice context is open to wider interpretations than how they are actually phrased. In spite of our preoccupation with the efficiency aspects, we are interested in other important issues of equity, and those of an administrative nature. But our remarks on the latter fronts are limited to the insight that we directly gain from the analytics.tax reform in transition countries, cash-flow tax, prepayment tax, ex-ante and ex-post equity, risk sharing, and tax reform

The efficiency loss of capital income taxation under imperfect loss offset provisions

The importance of capital loss offset provisions in a world of risk is well documented in the tax literature. However, the potential deadweight losses owing to imperfect offset has not been fully explored. This paper develops a framework whereby that investigation can be carried out and utilizes numerical simulations to investigate the size of potential losses. Results show that when the government and private sector are equally efficient in handling market risk, welfare losses owing to the absence of offset provisions could be substantial. Under plausible assumptions about attitudes towards risk and time preference, and with a capital income tax rate of forty percent, over sixty cents per dollar of tax revenue raised would be dissipated. In contrast, full loss offset would reduce that loss to approximately fourteen cents

Environmental quality and social insurance

This paper examines the double dividend hypothesis under wage uncertainty. In the presence of two market failures we show that second-best requires a lower than the Pigouvian tax, and a higher than "first-best" labour income tax. Starting from a state in which the environmental tax is below second best, we consider increasing it and at the same time recycle the additional revenues to reduce labour income tax. This revenue recycling policy has three effects: the positive Pigouvian effect, the negative tax interaction effect and the revenue recycling effect which is positive under certainty. In the presence of uncertainty, we find that the revenue recycling effect is negative if labour income tax is below second best, due to the social insurance effect. Our results have significant policy implications. First, environmental policies that do not generate revenue could be equally efficient to those that generate revenue. Second, revenues generated by environmental policies should not be used to decrease labour income taxes. We argue that environmental recycling policies can violate the uncontroversial, in the case of certainty, weak form double dividend hypothesis

Is There A Double Dividend From Classroom Experimental Games?

This paper provides evidence indicating that experimental games can trigger a double dividend. The dividend, measured in terms of enhanced performance, accrues to both the students and to the instructor. The evidence for the instructor’s dividend is obtained from evaluation questionnaires administered in an introductory microeconomics course at Thompson Rivers University (TRU) during the Fall 2006 where seven experimental classroom games were conducted to illustrate economic concepts. The evidence for the students’ dividend is obtained from examining marginal and absolute performance in two quizzes administered in the same course. We also find evidence that supports Fels earlier conjecture that the intensity of the games played is an important element for the enhancement of a student’s performance

Assessing the Value of a Park in a Rural-Urban Fringe Zone: A Case Study of Kenna Cartwright Nature Park in the Interior of British Columbia

This study estimates the value of green infrastructure and ecosystem services of the Kenna Cartwright Nature Park in Kamloops, British Columbia (B.C.). The 749 ha municipal park is considered the largest in the province of B.C. and the ninth-largest in Canada. The methodology allows for capturing natural, human, social, and built capital through an "opportunity cost" assessment of green infrastructure. It integrates the perceived benefits of urban parks found in numerous studies from stated preference methods and estimates the annual future growth rate of the value of ecosystem services. Kenna Cartwright Nature Park is estimated to be worth $2.96 billion and yields conservatively$45.7 million in annual ecosystem services or a 1.5% yield using a European transfer function, and $58.6 million per year or a 2$500 per year, and each person has 28.8 thousand worth of green infrastructure capital equally distributed. Kenna Cartwright Nature Park represents 20% of the value of all single-detached houses in Kamloops. For the lower, more conservative 1.5% yield, the annual ecosystem services are estimated to increase by 1.96% per year, similar to the long-run growth rate of Canada's standard of living of 2%, measured by GDP per capita. Keywords: Benefit transfer, ecosystem services, equivalency principle, green infrastructure, public goods _________________________________________  Évaluation de la valeur d'un parc en zone périurbaine : une étude de cas du parc naturel Kenna Cartwright à l'intérieur de la Colombie-Britannique Cette étude estime la valeur des infrastructures vertes et des services écosystémiques du parc naturel de Kenna Cartwright à Kamloops, en Colombie-Britannique (C.-B.). Le parc municipal de 749 ha est considéré comme le plus grand de la province de la C.-B. et le neuvième plus grand au Canada. La méthodologie permet de saisir le capital naturel, humain, social et bâti grâce à une évaluation du « coût d'opportunité » de l'infrastructure verte. Il intègre les avantages perçus des parcs urbains trouvés dans de nombreuses études à partir de méthodes de préférences déclarées et estime le taux de croissance annuel futur de la valeur des services écosystémiques. Le parc naturel de Kenna Cartwright est estimé à 2,96 milliards de dollars et produit de façon conservatrice 45,7 millions de dollars en services écosystémiques annuels ou un rendement de 1,5 % en utilisant une fonction de transfert européenne et 58,6 millions de dollars par an ou un taux de rendement de 2 % en utilisant la fonction de transfert globale. Sur une base par habitant à Kamloops, les services écosystémiques de Kenna Cartwright rapportent au moins 500 par an, et chaque personne dispose de 28 800 $ en capital d'infrastructure verte répartis également. Le parc naturel de Kenna Cartwright représente 20 % de la valeur de toutes les maisons individuelles à Kamloops. Pour le rendement inférieur et plus conservateur de 1,5 %, les services écosystémiques annuels devraient augmenter de 1,96 % par an, ce qui est similaire au taux de croissance à long terme du niveau de vie du Canada de 2 %, mesuré par le PIB par habitant. Mots-clés : transfert de bénéfices, services écosystémiques, principe d'équivalence, infrastructure verte, biens public

A behavioral economic approach to multiple job holdings with leisure

Financial constraints or economic needs, career development, psychological satisfaction as well as demographic and situational factors cause workers to seek more than one job while enjoying leisure time. In this paper we examine how a worker with prospect theory type of preferences allocates her time between leisure, a safe job and a risky job. Optimal time allocation for a sufficient loss averse worker depends on the reference level which in turn determines whether the worker is willing to experience relative losses or not. When the reference level is relatively low then the sufficiently loss averse worker will allocate some of her time to leisure and will hold both jobs in order to diversify risk and reduce income loss arising from the risky job. However, if the probability of a good state of nature is very high and the reference level is very low, the worker spends time only on leisure and the risky job while avoids the safe job. Loss aversion does not affect the optimal time allocation to the three activities as the time allocation results in avoiding relative losses for any state of nature. When the reference level is relative high, but not too high, the worker will allocate her time between both safe and risky jobs as well as to the leisure. Worker with very high reference level will avoid the safe job and will divide her time between the risky job and the leisure. In both cases the worker is willing to accept relative losses in the bad state of nature provided it is compensated with relative gains in the good state of nature. Here the allocation of time to the three activities depends on the degree of loss aversion. When the reference level is relatively low, but not too low, an increase in the reference level will reduce leisure time, reduce time in the risky job and increase time in the safe job. At very low reference levels, an increase in the reference level will result in the worker re-allocating her time from leisure to the risky job assuming the probability of a good state of nature is higher than a threshold. When the reference level is high the opposite effects are observed. We also examine other comparative statics including the effect of changes in the wage rate