Intergenerational Externalities, Government’s Tenure, And The Optimal Environmental Tax

The environmental pollution has been a big problem for many years, which attracts people’s attention. It not only does affect the individual’s physical health, but also may affect the macro-economy.We usually classify pollution as a negative externalities, which needs government intervenes, and moreover, taxation is a common solution to solve externalities.As we know, OECD countries have incorporated the environment tax into their tax system for a long history.In 2012 their environmental tax accounted for 6% of total tax revenue.In contrast, although there have been fuel tax, vehicle purchase tax and other such "quasi environmental taxes" in China, the tax scale is much smaller than the OECD countries. It is far from forming a perfect environmental taxation system.As a result,it is necessary to analyse further about the environmental tax.The existing researches have analyzed the environmental tax from various aspects,but these researches are all on the assumption that consumers and the government are infinite.That is to say, their researches are confined to the intragenerational externalities of pollution. In fact, compared with the long-lived environment, A consumer’s life is limited.The behaviors of contemporary people destroy(or improve) the environment quality.Then By accumulation,the polluted environment will affect the welfare of future generations. So called intergenerational externalities problem of pollution. Moreover, government’s tenure is short. Infinite government may not have the same motivation with the short-lived one in the formulation of environmental tax policy. The short-lived government imposes taxes to maximize the utility of the people who alive during his tenure,while the infinite government is expected to maximize the utility of all generations. In fact, the government’s tenure is often shorter than people’s life, which leads to intergenerational externalities can not be considered,so its policy decision is not Pareto optimal.Existing empirical studies have shown that the government’s tenure(or official’s tenure) does affect the formulation of policy and economic growth.This paper considers the intergenerational externalities from the production and government’s tenure in the overlapping generations model.We obtain the optimal environmental tax by the first-best method. Assuming that an economy is composed by perfectly competitive enterprises, consumers who live two periods and a long-lived or short-lived government.The production of the enterprises produce pollution, and the utility of the representative consumer is affected.The consumer makes his decisions to maximize his lifetime utility but he is constrainted by his budget and the environment.Due to the external effects of pollution, consumer’s behavior is not optimal, which requires government’s intervention; Next, assuming that government’s tenure is short or infinite,they are trying to design taxation and subsidies to solve externalities.However, because of the different objective function, the steady-state equilibrium is also different; Then, by comparing the competitive equilibrium allocation with the social optimal allocation,we got two different tax rate. Finally, two tax rates(optimal and non optimal) and variables in the steady state are compared by mathematical analysis and numerical simulation,the conclusions are as follows:1.Because of the externalities from production,the competitive equilibrium allocation can not reach the social optimal allocation;2.The infinite-lived government considers both intragenerational and intergenerational externalities,so its allocation is optimal. The greater the intergenerational externality, the greater optimal consumption tax rate the government decide. The optimal labor income rate is always zero.3.Short-lived government can solve the intrageneration externalities,but fails to internalize the intergeneration ones,so its allocation is nonoptimal.Moreover,it will subsidy to consumers. Also, the optimal labor income rate is zero.Therefore,the environmental taxation system must be designed by long-lived government.The contribution of this paper is introducing the government’s tenure in the overlapping generations model with the intergenerational externalities from the production. Through theoretical analysis, we have different tax rates designed by short or long-lived government.