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Fiscal Sustainability in the Presence of Regulatory Taxation

Usually, the long-term sustainability of fiscal policy is analysed without particular regard to the revenue side. The budget balance and the expenditure side dominate. This book integrates a specific tax module into the sustainability analysis building on tax elasticities. In doing so, we obtain a powerful tool to analyse one of the most controversial questions of contemporary tax research: Does the use of regulatory taxes endanger the long-term revenues and thus the sustainability of the tax system? We investigate this question empirically for the major German regulatory taxes - mainly "sin taxes" on alcohol and tobacco and environmental taxes. By analysing the elasticities of all German taxes for the last 30 years, we establish that normally no conflict arises between the revenue objective and the regulatory purposes of taxation. Especially in the last decade, taxes actively used as regulatory instruments displayed much better revenue dynamics than conventional taxes.

The empirical findings are generalised with a dynamic simulation of the potential Laffer problems of regulatory taxes. The results are clear-cut: In comparison to taxes that are not raised at all, regulatory taxation almost never leads to a conflict between revenue generation and the reduction of socially or environmentally disapproved behaviour. In most cases, regulatory taxes also yield higher intertemporal revenue than a more "worthy adversary", which we simulate as a policy of optimal maintenance of the tax base. Only when price and income elasticities of demand are atypically high, we indeed can identify a Laffer conflict. For the analysis of fiscal sustainability in the presence of regulatory taxation, the Blanchard-indicator developed by Talvi/Vègh (1998) is modified on order to integrate tax projections that are based on differentiated, non-linear scenarios of tax elasticities. We also make use of non-constant GDP growth rates which make allowances for demographic factors in the long term and cyclic developments in the short term.

The basic simulations of German fiscal policy in the next 50 years result in large sustainability gaps due to the current stance of public budgets and because of demographic factors. The specific tax simulations give further evidence that the use of regulatory taxes does not endanger fiscal sustainability per se. Regarding the long-term fiscal stance, we are not confronted with the question "Regulatory taxes - Yes or no?", but with the entirely different question "Regulatory taxes - Well-designed or not?" We also show that the usual assumption of unit elasticity of overall tax revenues with regard to GDP leads to massive distortions in the results of sustainability studies, which can possibly lead to classifying an unsustainable policy as sustainable. Regardless of our special attention for regulatory taxation, these results demonstrate that sustainability studies - even if their main focus is in the expenditure side - must not be invalidated by overly simple assumptions for the revenue side.

Auftraggeber German Federal Ministry of Finance
Bearbeiter Dr. Michael Thöne
Status Completed
Veröffentlichungen
Vereinbarkeit von Lenkungsbesteuerung mit der Tragfähigkeit der Finanzpolitik

Monatsbericht des Bundesfinanzministeriums, 4/2002, Berlin


Michael Thöne
Vereinbarkeit von Lenkungsbesteuerung (pdf, 122 KB)
Tragfähigkeit der Finanzpolitik bei Lenkungsbesteuerung
Dissertation - Köln, 2005
Michael Thöne
Dissertation M. Thöne (pdf, 1.8 MB)