the impact of a broad based energy tax on the us economy

The impact of a broad based energy tax on the US economy

Roy Boyd and Noel D. Uri

This paper investigates the impact of a broad based energy tax on the US economy, particularly the agricultural sectors. The analytical approach used consists of a general equilibrium model composed of 12 producing sectors, 13 consuming sectors, six household categories classijed by income and a government. The eflects of a 10 ctwts/Btu x IO” tax on energy on prices and quantities are examined. The results ure revealing. K~~J~L~IMI~.>: Btu 1~. Compatihlc general equilibrium model; Energy modelling

The US Congress and the Bush administration have finally agreed on a programme that will reduce the size of the federal budget deficit.’ Among the provislons in the delicit reduction programme is one calling for an increase in the federal excise tax on motor fuels by five cents per gallon beginning in December 1990. This tax is expected to generate between $4 and $5 billion in additional revenue (Council of Economic Advisors [ I 1 ] ).

Even though this most recent call for an energy tax increase has been met. there is a continuing debate (both within the Bush administration and outside of it) on whether a more broad based energy tax should also be imposed.’ Like the motor fuels tax, but unlike most other energy tax deliberations that had as their objective the reduction in energy consumption and hence a lessening of the dependence of the USA on imported crude oil,” the broad based energy tax proposal is primarily concerned with increasing federal revenue and reducing the magnitude of the deficit4 Obviously, there will be longer term benefits from such a tax in the form of reduced energy consumption and therefore increased energy conservation. These ancillary effects, however, are generally not afforded a central place in the discussions.’

Roy Boyd is with the Department of Economics, Ohio Universsity. Noel D. Uri is with the Resources and Technology Division, Economic Research Service, US Department of Agriculture, 1301 New York Avenue, NW,

Washington, DC, USA.

The views expressed are those of the authors and do not necessarily represent the policies of the organizations with which they are affiliated.

Final manuscript received 16 December 1990.

While the need to reduce the federal deficit is transparent, there is no compelling justification for selecting energy in deference to other goods and services as the commodity to bear the brunt of the effort. Clearly, there are certain benefits associated with using energy taxes to increase revenues but there are costs as well. These costs will not necessarily fall proportionately across all sectors of the economy. In particular, the agricultural sectors of the US economy stand to be affected because not only is energy an essential input into the production process but also because the agricultural sectors purchase manufactured inputs whose prices will rise with energy tax and available foreign exchange that might otherwise be used to purchase agricultural commodities will be diverted to the energy sector. Thus, while no attempt will be made to explore fully the costs on all sectors, the impact on the agricultural sectors of the costs of imposing a broad based energy tax will be measured

‘The specific provisions are delineated in the Budget Reconciliation Act of 1990 (HR 5835).

‘See eg, Inside the White House (Vol 9, No 28, 12 July 1990) and Wu11 Street Journal (6 July 1990). 3Energy tax proposals were commonplace ar&nd the time of the Arab oil embargo of 1973-74 and thereafter. These proposals will not be examined here. Rather, the interested reader is referred to, eg Brannon [6] and Hudson and Jorgenson 123,241. A discussion of some of the more recent proposals can be found in Gerardi and Toder 161. 4Note that it is not suggested here that the revenue considerations were absent in previous deliberations. Rather, revenue considerations never occupied a central place in the debates. 5That is, energy conservation as a goal does not hold the same level of importance that it did during the 1970s when energy supplies were much more uncertain than they are currently. Recent events in the Middle East, however, have made the concern about energy conservation greater than it was in, say, 1989.

258 0140/9883/91/040258-16 0 1991 Butterworth-Heinemann Ltd

The impact ~$a broad based energy tax on the US economy: R. Boyd and N. D. Uri

in an attempt to highlight the tradeoffs that policy- makers face as they continue to grapple with the federal

deficit reduction question. The possible impacts on the agricultural sectors

arise from a diversity of interrelationships. First (but not necessarily foremost), agriculture in the USA uses various types of energy, including motor gasoline,

diesel fuel, liquefied petroleum gas, natural gas and electrical energy. The prices of these energy types would increase as a result of the imposition of a broad based energy tax. Consequently, the agricultural sectors would encounter higher energy costs6 Next, the prices to the agricultural sectors of various factors of production will increase as the input costs (primarily energy-related costs) to manufacturers of, eg equipment and machinery, rise. Finally, the available foreign exchange that might otherwise be used to purchase agricultural commodities will be diverted to the energy (eg crude oil) sectors.’

Given these interrelationships between the agricultural sectors and the remaining sectors in the US economy, to analyse properly the impact of a broad based energy tax initiative, a comprehensive analysis must be employed, where the linkages between sectors of the economy are explicitly taken into account and the price responsiveness of producers and consumers both to absolute and relative changes in the prices of the various goods and services (including crude oil, refined petroleum products, natural gas and electrical energy) is considered. This paper provides such an analysis. The analytical approach used will be a computable general equilibrium model that has been disaggregated into 12 producing sectors, 13 consuming sectors, six household (income) categories and the government. This level of disaggregation allows for an assessment of the direct effects as well as the indirect effects of the imposition of a broad based energy tax. By measuring these effects, it will be possible to identify the extent to which the agricultural sectors and the other producing and consuming sectors and household groups stand to gain or lose. Hence, equity considerations as well as efficiency considerations can be addressed. Thus, the incidence of the broad based energy tax is

- 6Energy is a significant component of the cost of producing agricultural commodities. In 1989, for example, energy costs accounted for approximately 15% of the variable cost of producing a bushel of soybeans, about 19% of the variable cost of producing a hundredweight of rice, around 9% of the variable cost of producing a bushel of corn and almost 4% of the variable cost of producing 100 pounds of milk. (US Department of Agriculture 1361 reports these and other data.) ‘The issue of competition for foreign exchange is quite significant for agriculture and correspondingly, it has been studied extensively. A survey of the relevant analysis will not be provided here. Rather, the interested reader is referred to, for example, Abbott [l] and Sharples and Dixit [33].

ENERGY ECONOMICS October 199 1

endogenous to the analysis with no prior assumptions

being made. Before conducting the analysis, however, a brief overview of the model will be provided.

A general equilibrium model

Introduction

The use of a general equilibrium approach to modelling energy impacts is a logical decision.8 The interactions between supply and demand, both within the energy markets as well as between these markets and the rest of the economy, are quite significant. Thus, for example, interfuel substitution is a widely recognized phenomenon (see, eg Uri [37]) and the various energy interruptions and price increases have been shown to have important impacts on the remainder of the economy (see, eg Darby [ 121 and Uri [ 381).

The use of a general equilibrium model to assess the impact of changing energy prices on the economy is not unique to this study. Earlier efforts in this direction include those by Hudson and Jorgenson [ 241, Manne [27] and Borges and Goulder [4]. While it is not the purpose to critique these and other earlier efforts, it should be noted that each one is subject to a variety of shortcomings. One of these limitations is that agriculture is only considered as a component of some larger sector. Thus, for example, Hudson and Jorgenson have an agriculture, non-fuel mining and construction producing sector while Borges and Goulder have a single agriculture, forestry and fisheries producing sector (see, eg Hitch [21] and Manne [ 281 for a list of some of the limitations).

In the spirit of these earlier general equilibrium efforts, the model developed here attempts to capture the interrelationships between energy and economic activity while at the same time endeavouring to overcome some of their limitations.

The model presented below follows in the tradition of the Shoven and Whalley [ 341 tax analysis research and incorporates some of the methodological enhance- ments of the general equilibrium work of Hudson and Jorgenson [23]. For example, it recognizes the differences in preferences of consumers as a function of their incomes and specifies a distinct demand system for each group of households. Additionally, a neoclassical microeconomic model of producer behaviour is employed. The model of consumer behaviour is integrated with the model of producer behaviour (which contains a price-responsive input-output component) to provide a comprehensive framework for policy simulations.

*General equilibrium models in general will not be reviewed here. Rather, the interested reader is referred to Ballard et al [3] and Harberger [ 17, 181.

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The impact of a broad based energy tax on the US economy: R. Boyd and N. D. Uri

Table 1. Classification of producing sectors and consumer goods and services.

Industries Consumer goods

I Manufacturing 2 Mining 3 Service 4 Chemicals and plastics 5 Food and tobacco products 6 Petroleum refining 7 Financial 8 Forestry 9 Crude oil and natural gas

10 Agriculture 1 programme crops I I Agriculture 2 livestock 12 Agriculture 3 all other agriculture

1

12 13

Food Alcohol and tobacco Utilities Furnishings and appliances Housing Clothing and jewellery Transport Motor vehicles Financial and other services Reading and recreation Non-durable household items Gasoline and other fuels Savings

Table 2. Household categories based on income.

Category Income range (8)

I O-9999

II lOOOt-14999

111 15000-19999

IV 20 000-29 999 V 3OooOG39 999

VI 40000 and over

The general equilibrium nature of the model is reflected by its attempt to determine a vector of prices for consumer goods and services and producer goods and services that will clear all markets. The equilibrium prices determine the optimal allocation of resources, given the endowment of labour, capital and natural resources (land).

On the production side, technologies are represented by production functions that exhibit constant elasticities of substitution. Technological progress (both embodied and disembodied (see, eg Uri [39])) is assumed not to occur over the period of investigation.

On the demand side, the model captures the behaviour of consumers (who can also serve as investors), the government, and foreigners. Consumers are grouped according to income and a demand system is specified for each group. Each income group has an endowment of labour and capital and, given the vector of prices, decides the amount to save and invest and the amount of each good and service to consume (purchase). Investment, consequently, is determined by savings. The government levies taxes on both production and consumption. That is, there are taxes on factors of production, on output, on income and on consumption. Revenues are used to distribute income back to consumers and to purchase goods and services, as well as capital and labour.

The foreign sector produces imports and consumes exports. Trade balance is assumed (that is, the nominal

260 ENERGY ECONOMICS October 199 1

value of exports is assumed to equal the nominal value of imports in equilibrium) but the exchange rate is not explicitly incorporated into the model specification. Exports are scaled to match imports. As a result, foreigners can be regarded as consumers who purchase US exports with income from the sale of imports to the USA.

Table 1 details the specific producing sectors and types of consumer goods and services considered in the general equilibrium model. The various household categories (classified by income) are delineated in Table 2. This choice of the level of disaggregation was predicated on the availability of data and on the economic variables (producing and consuming sectors and income categories) that are of interest.

A general equilibrium model’

Production. The production component of the general equilibrium model is composed of an inputtoutput model with some flexibility with regard to the substitution of the factor inputs (capital, labour and land). The degree of flexibility depends on the choice of functional form for the production function. In the current model, each sector is assumed to have a constant elasticity of substitution (CES) production function (see Arrow et al [2]) where the value added by the specific sector is a function of labour and capital.

For four sectors (the three agricultural sectors and the forestry sector), however, a third factor of production - land ~ is included. This is done because of the special importance of this input to these sectors. (See, eg, Heady and Dillon [ 191 for a discussion of this issue.) The incorporation into the production function of this factor is accomplished by nesting the CES production function. In particular, an input is

9A comprehensive description of the general equilibrium model together with its parameterization is found in Boyd [S].


defined which is solely a function (in CES form) of

land and capital which, in turn, takes the place of capital in the original production function specification. While it would be possible to simply add land as an explicit input in the production function, this would implicitly assume that the elasticity of substitution between all pairs of inputs are the same. By nesting, however, the substitution elasticities are permitted to be different between different inputs.

Demand. The output of the 12 producing sectors accrues to the owners of the factors of production (ie land, labour and capital) which they sell. With the receipts from sales, these individuals either consume domestic or foreign goods and services, save, or pay taxes to the government. The savings are used for investment and the taxes are ultimately returned to these individuals.

The demand for final goods and services comes from three primary sources. First, final goods and services may be directly consumed by individuals. Second, investment (which is equal to savings) consumes some of the goods and services produced. Finally, foreign demand (in the form of exports) consumes a portion of the goods and services.

A review of Table 1 will show that the composition of the consumer goods and services sectors does not match that of the producing sectors because the final goods and services produced by the producing sectors must go through various channels (ie transport and distribution) before they can be consumed. To address this problem, a transformation matrix is introduced that defines the contribution of each producing sector to the composition of each of the final (consumer) goods and services.

For each category of households (Table 2), utility is assumed to be a weighted constant elasticity of substitution (CES) function of the 13 consumer goods and services. The weights on these goods and services (which are household category specific) are computed as the share of total purchases going to a specific consumer good or service. The nature of the CES utility function implies that the elasticity of substitution is the same between any pair of goods and/or services. Because reliable estimates of the respective substitution elasticities across pairs of goods and/or services are difficult to obtain, they are assumed to equal one for all the combinations. Finally, consumers obtain utility from the consumption of all goods and services including leisure (consumer good and service sector number 10). Hence, it is necessary to determine a weight for this factor in the utility function. For the purpose of the current analysis, this value is assumed to be 0.5 times labour income. The net effect of adding leisure is to incorporate explicitly the fact that

ENERGY ECONOMICS October 1991

consumers not only derive utility from the act of consuming goods and services (which comes through owning the factors of production) but that they also derive utility from leisure. Thus, an increase in leisure can lead to an enhancement of individual well-being in the model. (The astute reader will note that with this specification, there is an explicit treatment of the labour-leisure trade-off. See, eg, Deaton and Muellbauer [ 131 for more information.)

A household’s budget constraint is defined such that expenditures on goods and servuces must be less than or equal to its income, which is defined to equal its portion of the returns to labour plus the returns to capital plus the returns to land. That is, expenditure by a household must be less than or equal to the total factor payments it receives. Maximizing utility subject to this expenditure constraint gives the demand for the various goods and services by household categories (see, eg, Mixon and Uri [ 3 11 for a discussion of this). Observe that since savings are considered as one of the items in an individual’s utility function, the choice between consumption and savings is made explicit. That is, intertemporal trade-offs are an integral part of the model.

The second component of the demand for goods and services is investment. Like the final demand by individuals, total investment is disaggregated (through a transformation matrix) by the sector of the economy that produces it. For the purpose of constructing the general equilibrium model and calibrating it, investment is taken directly from the national income and product accounts (as compiled by the Bureau of Economic Analysis of the US Department of Commerce) and, since savings are assumed to exactly equal investment, personal savings are scaled to equal the gross investment observed (measured) for each of the 12 producing sectors.

The final component of demand for goods and services is the demand by foreign consumers. In the model exports (ie foreign demand) are delineated by producing sector. That is, a transformation matrix analogous to that used for the consumption of final goods and services is employed. A similar delineation is utilized for imports (ie foreign supply). The exports and imports are then scaled so that the total foreign account is balanced. By employing elasticity estimates (both demand and supply) found in the literature, export and import demand relationships are constructed for each producing sector.

Tuxes. The government and its tax receipts are an integral part of the general equilibrium model formulation. Tax receipts do impact the model results with regard to factor use, factor prices and output.

261

The impact qf a broud based energy tax on the US economy: R. Boyd and N. D. Uri

First, there is a question of how to treat the government in a general equilibrium model. For the purpose at hand, it is treated as a separate sector with a constant elasticity of substitution utility function. That is, it is treated in a fashion analogous to one of the household sectors. The elasticity of substitution is assumed to be one. This means that the CES

production function collapses to a Cobb-Douglas- type production function. The government collects tax revenue in various forms. The explicitly considered taxes include personal income tax, labour taxes (eg a social security tax), capital taxes (eg a corporate income tax), property taxes and sales and excise taxes. All these are treated as ad valor-em taxes and a marginal rate is used for each household category, consumer good and service sector, producing sector and factor input. (Note that in this model, labour is treated as a variable factor of production that is subject to taxation.) In this respect, the model is a distinct improvement over earlier general equilibrium models (eg Shoven and Whalley [ 341) which simply employed lump sum transfer schemes or used average tax rates.

A mathematical statement of the model. Given these foregoing considerations, it is useful to state precisely the conditions that the model being used here must satisfy for a general equilibrium to exist. First, there cannot be positive excess quantities demanded. That is,

f aij Mj - Ei(p, Y) 2 0 for cs pi 3 0 j=l

(1)

and where i (i = 1,2, ..., n) denotes the consumer goods and services, Mj 0’ = 1,2, ..., m) denotes the activity levels, aijdenotes the i$h element in the activity analysis matrix, Y denotes a vector of incomes for the k consumers, p denotes a vector of prices for the n

consumer goods and services and Ei denotes the excess demand for good or service i.

The notation cs implies that complementary slackness holds for each consumer good and service. That is, if the expression (for a specific good or service i) is multiplied by pi, then the relationship will hold with

equality (see, eg, Takayama and Uri [35]). The second requirement for general equilibrium is

that the profits associated with a given activity are not positive. That is,

”

- 1 aijpi30forcsMj>0 (2) i=l

Finally, all prices and activity levels must be non- negative. That is,

pi>O,i= 1,2,...,n (3)

and

Mj 3 0,j = 1,2, . . ..rn (4)

The model is solved for a general equilibrium using the iterative algorithm nominally referred to as the Sequence of Linear Complementary Problems (SLCP) developed by Mathiesen [29, 303.

A complete listing of the equilibrium conditions together with relevant definitions is found in the appendix.

Duta for the 1984 base year. The general equilibrium model is calibrated for 1984. For the producing sectors (the 12 enumerated in Table 1 ), data on capital receipts and taxes are computed from data obtained directly from the Bureau of Economic Analysis of the US Department of Commerce, the US Department of Agriculture, the US Department of Energy and from Hertel and Tsigas [20]. The various elasticities of substitution employed in the analysis were obtained from the empirical literature on production functions. (Boyd [S] has the details on where the values of the elasticities of substitution were found.)

Capital income (earnings) and labour income were obtained from the Bureau of Economic Analysis of the US Department of Commerce. Land income was estimated using factor shares obtained from the Economic Research Service of the US Department of Agriculture and applied to the capital income component noted above.

Data on expenditures on each of the 13 goods and services by each of the six household categories were obtained from the Consumer Expenditure Survey:

Interview Survey, 1984 (Bureau of Labor Statistics [ 71). By combining this information with the number of households in each household (income) category (these data come from the Bureau of Economic Analysis), the aggregate expenditures on each category of consumer goods and services by each household category were computed.

The various tax rates used in the analysis were obtained from a variety of sources including the Internal Revenue Service, the Economic Research Service of the Department of Agriculture, Hertel and Tsigas [20], and Ballard et al [3]. These rates, as noted previously, are marginal rates.

The value of exports and imports in 1984 were taken from the Suruey of Current Business (various issues) with the exception of the energy data which were obtained from the Energy Information Administration of the US Department of Energy and the agriculture data which were obtained from the Economic Research Service of the US Department of Agriculture.

262 ENERGY ECONOMICS October 1991

The impact qf’a broad bused energq’ tax on the US economy: R. Boyd and N. D. Uri

A methodological caveat

Before proceeding to discuss the results obtained from the general equilibrium model, a short digression is in order. In particular, a discussion concerning the advantages and shortcomings of using the particular modelling approach that has been opted for here is in

order. The primary advantage of the general equilibrium

modelling approach is that, with all economic entities maximizing their behaviour (subject to the relevant constraints), all markets are required to clear. No transactions are conducted at prices other than equilibrium prices and for every factor of production and every good and service consumed, the quantity supplied must exactly match the quantity demanded. All interactions among markets are taken into account and, consequently, all interrelationships between sectors (both consuming and producing sectors including the agricultural sectors) are explicitly considered.

Another advantage of this modelling approach is that it performs the analysis at a disaggregated level and hence can identify sector specific impacts of the policy question being addressed. Frequently, small aggregate effects obfuscate the larger impacts at the sectoral level. Thus, for example, at the aggregate level a change might have little effect on income, but at the household level, the distributional impacts on income might be fairly substantial.

The general equilibrium model also includes a treatment of all taxes. These taxes can introduce a considerable differential between prices paid by consumers and prices received by producers. This can result in distortions in market signals that lead to market failure (eg inefficient use of factors of production.) (See, eg, Friedman [ 151 for more on this.)

The model is solved numerically and, after any change in the exogenous (eg policy) variable(s), a new, independent (ie independent of the previous solution) equilibrium is computed. As a result, the conclusions do not depend on first-order or second-order approxi- mations or the assumption of an infinitesimally small change in one or more of the variables.

The general equilibrium modelling approach is not devoid of deficiencies. The values of the various parameters used in the model are not estimated directly by econometric means. Rather, as noted, they are taken from the literature and represent a consensus among researchers with regard to appropriate values. This does not mean that a complete set of econometric results cannot be generated at some future date. The complexities of such an undertaking, however, are enormous (see, eg, Jorgenson [25] and MacKinnon [26] for a discussion of these complexities) and so it is not attempted here.


Another assumption that does not emulate reality completely is that consumer and producer behaviour is modelled with full and complete adjustment between perturbations. This means that the distributed lags associated with the adjustments of the various factors are not overtly modelled although the magnitude of the full adjustment by each producing and consuming sector is captured. Additionally, there is the implicit assumption that all economic agents know the vector of final equilibrium prices, thus allowing for full

adjustment on their part. Finally, the model does not, as noted, make any

provision for technological innovation and, hence, is not suitable for addressing policy issues that will take a long time to have their full (cumulative) impact.

These model limitations imply that the results of the subsequent modelling effort should not be unequivocally accepted but rather interpreted in the context of offering an improved, but not perfect, analysis of the impact of a broad based energy tax.

General equilibrium results

Before discussing the results of the general equilibrium model, two points need to be made. First, there are several different types of broad based energy taxes that can be imposed. (These are reviewed in Brannon [ 63.) The one that will be considered here is the Btu (British thermal unit) tax on total energy.” With regard to this sort of tax, it can be imposed at the point of energy production (and, in turn, passed on to consumers in the form of higher energy prices) or it can be imposed directly on consumers at the point of purchase (consumption). l1 Both methods of taxation have their

shortcomings with regard to collecting the tax (ie the mechanics of tax collection are different) but beyond this, are there differential impacts on the producing and/or consuming sectors that a partial equilibrium analysis would not identify? This is an empirical question and, as such, will be subject to scrutiny.

Second, as observed in a preceding section, the model is solved by the SLCP algorithm of Mathiesen. This algorithm is based on the fixed point theorem proved by Scarf [32].

Third, the magnitude of the effect that an energy tax will have on the substitution of other goods and

“The Btu serves as the common measure across all the different types of energy considered in this study. “Recall thai there are two groups of consumers. The first consists of producers who have a derived demand for energy. This derived demand is responsive to changes in the price of energy. (See, eg. Uri 1371 for more on this.) The second group of consumers are final consumers (households) who directly consume energy. This demand is likewise a function of the price of energy. (Again, see Uri

1371.)

263


Table 3. Reference case - equilibrium prices (normalized) and quantities (hundred billion dollars) for the producing sectors.

I Manufacturing 2 Mining 3 Service 4 Chemicals 5 Food and tobacco 6 Petroleum refining 7 Financial 8 Forestry 9 Crude oil

IO Agriculture - PC 11 Agriculture - L 12 Agriculture - 0

Total

Price

1 .OOoOO 1 .oooOO 1 .oooOO 1 .oooOO 1 .ooooO 1 .ooooo 1.00000 1 .ooOOo 1 .OOOOo 1 .OOOOo 1 .ooOOo 1 .oocQo 1 .ooooo

Quantity

18.87620 0.4623 I

23.78181 2.27315 3.50514 1.61241 5.54883 0.10592 1.29060 0.45210 1.0992 1 0.61286

59.62173

Note: For the agriculture sectors, PC denotes programme crops, L denotes livestock, and 0 denotes all other agricultural activities. Some of the other titles have been abbreviated. The complete titles are given in Table 1.

Table 4. Reference case - equilibrium prices (normalized) and quantities (hundred billion dollars) for the consuming sectors.

1 Food 1 .ooooo 4.52066 2 Alcohol and tobacco 1 .ooooo 0.83300 3 Utilities 1 .oooOO 1.17793 4 Furnishings 1 .oooOO 1.46137 5 Housing 1 .OwOo 3.74071 6 Clothing 1 .OOOOo 1.83323 7 Transport I .ooooo 0.28041 8 Motor vehicles 1 .oooOO 1.46337 9 Financial 1 .ooOOo 5.58740

10 Reading and recreation 1 .OOOOo 1.66132 11 Non-durable goods 1 .ooooo 0.67238 12 Gasoline 1 .ooooo 0.91156 13 Savings 1 .oooOO 3.03333

Total 1 .ooooo 27.43668

Price Quantity

Note: Some of the sector titles have been abbreviated. The complete designations are given in Table 1

services consumed for energy is an important consider- ation. Consequently, median values of 1.0 for the elasticities of substitution between the various types of energy and other goods and services incorporated in the model are used. (These values are consistent with the values reported by Uri [37].) Because of the potential overall importance of these values to the results of the analysis, however, a sensitivity analysis will also be performed whereby the values will be assumed to vary around the point estimates.

Reference case

The reference case results (both quantities and normalized prices) are presented in Tables 3, 4 and 5 for the producing sector, the consuming sector, and households (income categories), respectively. Note that the nominal value of the quantities are in hundreds of billions of 1984 dollars. The sector numbers and category numbers correspond to those used in Table 1 and Table 2. By themselves, the values found in

Table 5. Reference case - equilibrium utility levels (hundred billion dollars) by household categories.

Category Utility level

I 2.23826 II 2.10802

III 2.42411 IV 6.01311 V 5.49733

VI 13.73632 Total 32.01731

Government 7.45752

Note: The household categories correspond to those defined in Table 2.

Tables 335 provide little useful information beyond showing how the model is calibrated. Rather, the significance of the general equilibrium model and of the equilibrium values is in how these values change in response to some policy initiative(s) that perturb(s) the general equilibrium.


The impact qf a broad based energy tax on the US economy: R. Boyd and N. D. Uri

Table 6. Btu tax on production - equilibrium prices (normalized) and quantities (hundred billion dollars) for the producing sectors.

Sector Price Quantity

1 Manufacturing 1 .OOOQo 18.86891 2 Mining 1.07041 0.45034 3 Service 0.99951 23.73993 4 Chemicals 1.00192 2.26878 5 Food and tobacco 0.99892 3.50181 6 Petroleum refining 1.02813 1.59823 7 Financial 0.99707 5.54882 8 Forestry 0.9973 1 0.10626 9 Crude oil 1.04269 1.28489

10 Agriculture - PC 0.99975 0.45218 11 Agriculture - L 0.99877 1.09838 12 Agriculture - 0 1 .oooo 1 0.61168

Total 1.00118 59.53019

Note: For the agriculture sectors, PC denotes programme crops, L denotes livestock, and 0 denotes all other agricultural activities. Some of the titles have been abbreviated; the complete titles are given in Table 1.

Table 7. Btu tax on production - equilibrium prices (normalized) and quantities (hundred billion dollars) for the consuming sectors.


1 Food 0.99925 4.5 1546 2 Alcohol and tobacco 0.99921 0.83206 3 Utilities 0.99950 1.17599 4 Furnishings 0.99979 1.45854 5 Housing 0.99727 3.74304 6 Clothing 1.00016 1.82901 7 Transport 0.99950 0.27995 8 Motor vehicles 0.99964 1.46074 9 Financial 0.99947 5.85380

10 Reading and recreation 0.99970 1.6583 1 11 Non-durable goods 1.00390 0.66834 12 Gasoline 1.01421 0.89688 13 Savings 1.00003 3.02325

Total 0.99253 27.37960

Note: Some of the sector titles have been abbreviated. The complete designations are given in Table 1

Table 8. Btu tax on production - equilibrium utility levels (hundred billion dollars) by household categories.


I 2.23479 II 2.10428

III 2.41992 IV 6.00356 V 5.48935

VI 13.71602 Total 3 1.96790

Government 7.52109


Btu tax on energy imposed at the point of production

Tables 6,7 and 8 present the general equilibrium values for prices and quantities for the producing sectors, consuming sectors and households, respectively as a result of imposing a 10 cents/Btu x lo6 tax on all

energy produced. Tables 9, 10 and 11 indicate the changes in the equilibrium quantities in the producing sectors, consuming sectors and households in response to a 10 cents/Btu x lo6 tax. Most considerations of a broad based energy tax look at a tax rate ranging

between 10 cents/Btu x lo6 and 25 cents/Btu x 106. (For a listing of these studies, the interested reader is referred to Congressional Budget Office [lo], Council of Economic Advisors [ 1 l] and Energy Information Administration [ 143.) For the initial assessment in this study, the lower bound in this range was selected. Subsequently, larger amounts are analysed. Also, note that for energy imported (eg crude oil), the tax is imposed at the point of entry into the USA. No tax is imposed on energy exported.

The higher price of energy as a result of the Btu tax imposed at the point of production will have several effects. Consider the producing sectors first. In response to the overall higher price of energy, total output in the producing sectors will fall by 0.153% or


The impact of a broad based energy tax on the US economy: R; Boyd and N. D. Uri

Table 9. Comparison - change in the equilibrium quantities (hundred billion dollars) for the producing sectors.

Btu tax on

production - Sector reference case

1 Manufacturing ~ 0.00730 2 Mining -0.01196 3 Service -0.04190 4 Chemicals - 0.00497 5 Food and tobacco -0.00393 6 Petroleum refining -0.01418 7 Financial -0.00001 8 Forestry 0.00035

9 Crude oil -0.00571 10 Agriculture - PC 0.00008 11 Agriculture - L -0.00083 12 Agriculture - 0 -0.00118

Total -0.09154

Btu tax on consumption - reference case

0.00221 -0.00061 -0.07620 -0.00084 -0.00174 -0.00256

0.00438 0.00022

- 0.00289 - 0.00038 - 0.00042 -0.00094 -0.05988

Note: For the agriculture sectors, PC denotes programme crops, L denotes livestock, and 0 denotes all other agricultural activities. Some of the titles have been abbreviated; the complete titles are given in Table 1.

Table 10. Comparison - change in the equilibrium quantities (hundred billion dollars) for the consuming sectors.

Sector

Btu tax on production - reference case

Btu tax on consumption - reference case

1 Food - 0.00520 0.00242

2 Alcohol and tobacco - 0.00094 0.00044

3 Utilities -0.00194 -0.06723

4 Furnishings -0.00283 o.oOQ41

5 Housing 0.00233 0.00454

6 Clothing - 0.00422 0.00048 7 Transport ~ 0.00045 0.00008

8 Motor vehicles - 0.00263 0.00952

9 Financial 0.25062 0.26 189

10 Reading and recreation -0.00301 0.00055

1 I Non-durable goods ~ 0.00403 -0.00140

12 Gasoline -0.01467 -0.00839

13 Savings -0.01008 0.00399

Total 0.20292 0.19831

Note: Some of the sector titles in the table have been abbreviated. The complete designations are given in Table 1.

Table 11. Comparison - change in the equilibrium utility levels (hundred billion dollars) by household categories.

Category

I II

III IV V

VI Total

Government

Btu tax on Btu tax on production - consumption - reference case reference case

-0.00347 ~ 0.00537 -0.00374 - 0.00565 -0.00425 -0.00629 -0.00955 -0.01431 -0.00799 -0.01134 -0.02030 -0.02770 -0.04930 -0.07066

0.06356 0.06688


by about $9.154 billion. l2 This fall, however, is not uniformly spread across producing sectors. For example, the output of crude oil and natural gas will fall by 0.442% ($571 million).13 For the petroleum refining sector, output falls by 0.879% ($1.418 million). Output in the mining sector will fall by the largest (proportionate) amount of 2.588% ($1.196 billion).

“Note that these and other effects are in terms of the annual impacts. That is. they indicate what will occur each year. 131n order to limit the number of tables, some ot the equilibrium prices and quantities will not be explicitly presented although selected values will be discussed. Such is the case with the prices and quantities of imported and exported goods and services. The omitted tables are available from the authors upon request.

266 ENERGY ECONOMICS October 199 1

The impuct qf u broad bused energy tax on the US economy: R. Boyd and N. D. Uri

This reflects the impact of the Btu tax on the demand for coal which has a relatively large own-price

elasticity. The observed results are consistent with a priori

expectations. Output falls primarily because with a higher price of energy at the point of production, the price of some intermediate inputs (ie energy) used in the production process rise and, given the afore- mentioned requirement that the equilibrium conditions in all markets must be met and given that nothing else changes, factor use (in physical terms) falls. Conse- quently, output declines.

What will happen in the three agriculture sectors plus the forestry sector? Output in the programme crops sector will rise by 0.018% (or by $8.3 million), output in the livestock sector will decline by 0.075%

(or by $83 million) and output in the all other agriculture commodities sector will be reduced by 0.192% (or by $118 million). Output in the forestry sector will rise by 0.327% (or by $34.7 million). Thus, a Btu tax at the point of production stands potentially to impose some costs, in terms of reduced output, on the agriculture sectors (consisting of the three agriculture sectors plus the forestry sector) of about 0.002% (or $158 million) in the aggregate. The reduction in output in the livestock and all other agricultural sectors comes about because the higher costs of production are not offset by other factors. The rise in the output of programme crops results from an increase in the demand for ethanol (made from corn which is a programme crop). (Ethanol is assumed not to be taxed in the analysis and it is assumed to be a perfect substitute for gasoline.) The increase in the cost of production is outweighed by the increase in the demand for corn resulting in the observed result. Output in the forestry sector increases because of the substitution of wood (which does not incur a Btu tax) as fuel for the various types of taxed energy.

Accompanying the changes in agricultural output are changes in the prices of the agricultural commodities. Thus, for example, the price of the output of programme crops will decline by 0.024%, the price of the output of the livestock sector will fall by 0.122%, the price of the output of all other agricultural commodities will increase by 0.001% and the price of the output of forestry products will fall by 0.268%. While these price changes might seem anomalous at first, they are not when considered in the context of a general equilibrium. Simply recall that the imposition of a Btu tax leads to a reduction in the quantity of agricultural commodities demanded due to a lower quantity of foreign exchange since the imports of crude oil falls. This, in turn, will result in lower prices for the agricultural commodities (with the exception of the all other agricultural commodities sector which


increases almost insignificantly). Additionally, this reduction more than offsets the increase in the demand for corn and wood. The net effect, then, is a fall in the prices of the various agricultural commodities.

With regard to the consuming sectors, a Btu tax at the point of production in the aggregate results in a slight increase in the consumption of goods and services by about 0.746% ($20.292 billion). This increase is primarily attributable to the financial sector which experiences a 4.485% ($25.062 billion) increase in output. The financial sector is an anomaly since its output is a non-traded good. As such, the equilibrium price and quantity behave as expected for this type of

good. ’ 4 The most adversely impacted sector is the gasoline and other fuels sector which experiences a 1.610% ($1.467 billion) fall in consumption. Most other sectors similarly experience a decline in consumption attributable to the indirect effects of the Btu tax. These indirect effects include a lower real income (brought about by an increase in the price of energy related goods) and changing relative prices.

Utility falls for all six of the household categories. The aggregate reduction in utility is 0.154% ($4.930 billion) for all households, however. Category VI households (ie those with incomes in excess of $40 000) experience a reduction in utility of 0.148% ($2.03 billion) while Category V households (ie those with incomes ranging between $30 000 and $39 999) suffer a 0.145% ($799 million) reduction in utility. The remaining household categories incur percentage reductions in utility of about the same order of magnitude. Additionally, when all of the effects of the imposition of a Btu tax are considered (that is, both the direct and the indirect effects), such a tax increase is not, in general, regressive.” That is, it does not fall most heavily on the lowest household (income) category and progressively less heavily on households with larger incomes. Rather, the effect is approximately constant (in relative terms) across income categories.

The government is the main beneficiary of the Btu tax on energy at the point of production. Since the revenue generated by the tax accrues to the government its income increases, leading to an increase in utility of 0.852% or about $6.356 billion. This, in turn, can be used to retire a small portion of the federal deficit.

In sum, then, the impact of a 10 cents/Btu x lo6 tax on energy imposed at the point of production will be a reduction in output by all producing sectors of

14The theory of non-traded goods is not developed here. Rather, the interested reader is referred to, eg, Caves and Jones ([S]. pp 90 ff) for a complete analysis. “There is no claim made that the direct etTects are not regressive. As many researchers have adequately demonstrated (eg Congressional Budget Office [9]), when just the direct (initial) impacts of a gasoline tax increase are considered, such a tax is clearly regressive.

267


Table 12. Btu tax on consumption - equilibrium prices (normalized) and quantities (hundred billion dollars) for the producing sectors.


1 Manufacturing 1 .ooooo 18.8983 2 Mining 0.99982 0.46 170 3 Service 0.99995 23.7056 4 Chemicals 1.00009 2.2729 1 5 Food and tobacco 1 .OOOOl 3.50400 6 Petroleum refining 1.01906 1.60985 7 Financial 0.99902 5.55321 8 Forestry 0.999 13 0.10614 9 Crude oil 0.99872 1.28771

10 Agriculture - PC 1.00069 0.45 I72 11 Agriculture L 1.00027 1.09879 12 Agriculture - 0 1.00076 0.61191

Total 1.00039 59.56184

Narr: For the agriculture sectors, PC denotes programme crops, L denotes livestock, and 0 denotes all other agricultural activities. Some of the titles have been abbreviated; the complete titles are given in Table 1.

Table 13. Btu tax on consumption - equilibrium prices (normalized) and quantities (hundred billion dollars) for the consuming sectors.


1 Food 1 .ooooo 4.52308 2 Alcohol and tobacco 0.99998 0.83345 3 Utilities 1.06086 1.11070 4 Furnishings 0.99997 I.461 78 5 Housing 0.999 10 3.74525 6 Clothing 1 .ooOOo 1.83371 7 Transport 0.99995 0.28049 8 Motor vehicles 0.99989 1.46389 9 Financial 0.99992 5.84929

10 Reading and recreation 0.99998 1.66187 I1 Non-durable goods 1.00243 0.67097 12 Gasoline 1.00961 0.903 17 13 Savings 1.00001 3.03732

Total 0.99550 27.37498

Note: Some of the sector titles in the table have been abbreviated. The complete designations are given in Table 1.

0.153% or about $9.154 billion, a decline in output in the agricultural sectors of 0.002% or about $158 million, an increase in the consumption of goods and services by about 0.747% or $20.292 billion, a fall in total utility by 0.154% or $4.930 billion and increased revenue (from the Btu tax) for the government of $6.356 billion.

What would be the impact of imposing a somewhat larger tax of, say, 25 cents/Btu x lo6 on energy at the point of production? The pattern of the effects would be analogous to those observed with the 10 cents/ Btu x lo6 tax although the order of magnitude would be somewhat larger. l6 For example, relative to the

reference case, for the producing sectors, output declines by 0.381% ($22.807 billion). Sector specific impacts find output in the crude oil and natural gas sector declining by 1.087% ($1.4113 billion) and, in the petroleum refining sector, output would be reduced

“‘A complete listing of the results is available from the authors upon request.

by 2.106% ($3.518 billion). Output in the agricultural sectors would decline collectively by 0.006% ($355 million). The total consumption of goods and services increases by approximately 1.081% ($29.216 billion) ~ again due to the increase in consumption in the financial sector ~ while the consumption of gasoline declines by 3.899% ($3.623 billion). Aggregate utility falls by 0.376% ($12.318 billion) with the decline evenly spread (in relative terms) across household categories. Government revenue increases by $15.576 billion over the reference case. This compares to the $6.356 billion increase witnessed with a 10 cents/ Btu x lo6 tax.

Btu tax on energy imposed at the point of consumption

Turn now to the situation where a 10 cents/Btu x lo6 tax is imposed at the point of consumption as opposed to being imposed at the point of production. Tables 12, 13 and 14 present the general equilibrium values for prices and quantities for all sectors as the result



Table 14. Btu tax on consumption - equilibrium utility levels (hundred billion dollars) by household categories.


I 2.23289 II 2.10237

III 2.41788 IV 5.99880 V 5.48600

VI 13.70862 Total 3 1.9465 I

Government 7.52441

Notr: The household categories correspond to those defined in Table 2.

of the imposition of this tax. Tables 9, 10 and 11 indicate the changes in the equilibrium quantities in the producing sectors, consuming sectors and households in response to a 10 cents/Btu x lo6 tax.

The higher price of energy as a result of the Btu tax imposed at the point of consumption will have several effects. Consider the producing sectors first. In response to the overall higher price of energy, total output in the producing sectors will fall by 0.100% or by about $5.988 billion. This fall is not uniformly spread across producing sectors. For example, the output of crude oil and natural gas will fall by 0.224% ($289 million). For the petroleum refining sector, output falls by 0.159% ($256 million).

The results are consistent with what one would expect. Output falls primarily because with a higher price of energy at the point of consumption, the quantity demanded of various types of energy by producers will fall. (This is reflecting the derived demand component of the total demand for energy.) Additionally, the price of some intermediate inputs (ie energy) used in the production process will rise, changing the costs of production and thereby changing the relative prices of the goods and services being produced. This will lead to a change in the aggregate composition of goods and services produced.

Output in the three agriculture sectors plus the forestry sector will be affected by the Btu tax imposed at the point of consumption. For example, output in the programme crops sector will fall by 0.084% (or by $38 million), output in the livestock sector will decline by 0.038% (or by $42 million) and output in the all other agriculture commodities sector will be reduced by 0.154% (or by $94 million). Output in the forestry sector will rise by 0.208% (or by $221 million). Thus, a Btu tax at the point ofconsumption will impose some costs, in terms of reduced output, on the agriculture sectors (consisting of the three agriculture sectors plus the forestry sector) of about 0.002% (or $152 million) in the aggregate. The reduction in output


in the programme crops, livestock and all other agricultural sectors comes about because the higher costs of production are not offset by other factors. Output in the forestry sector increases because of the substitution of wood (which does not incur a Btu tax) as fuel for the various types of taxed energy. However, unlike the situation when the Btu tax was imposed at the point of production, the rise in the output of programme crops as a result of the increase in the demand for ethanol (ie corn) due to the Btu tax at the point of consumption is not sufficient to overcome the reduced output attributable to the higher costs of production.

Accompanying the changes in agricultural output are changes in the prices of the agricultural commodities. Thus, for example, the price of the output of programme crops will increase by 0.069%, the price of the output of the livestock sector will rise by 0.027%, and the price of the output of all other agricultural commodities will increase by O.O76o/. The price of the output of forestry products will fall by 0.086%. These changes are consistent with expectations.

With regard to the consuming sectors, a Btu tax at the point of consumption in the aggregate results in slight increase in the consumption of goods and services by about 0.729% ($19.830 billion). As before, this increase is primarily attributable to the financial sector which experiences a 4.687% ($26.189 billion) increase in output. The most heavily impacted sector is the utilities sector which experiences a 5.707% ($6.723 billion) fall in consumption. (Recall that the utilities sector contains electric utilities and natural gas utilities which account for large amounts of the energy consumed ~ both directly to generate electrical energy and for resale ~ in the USA.) Most other sectors similarly experience a decline in consumption attributable to the indirect effects ofthe Btu tax. These indirect effects include a lower real income (brought about by an increase in the price of energy related goods) and changing relative prices.

Utility falls for all six of the household categories and this fall is greater than that observed when the Btu tax is imposed at the point of production. The aggregate reduction in utility is 0.221% ($7.066 billion) for all household categories. The reduction does fall fairly evenly across households. Category I households (ie those with incomes less than $9999) experience a reduction in utility of 0.239% ($537 million) while Category III households (ie those with incomes ranging between $15 000 and $19 999) suffer a 0.259 % ($629 million) reduction in utility. The remaining household categories incur percentage reductions in utility of about the same order of magnitude. Additionally, when all of the effects of the imposition of a Btu tax are considered (that is, both the direct

269

The impact qj’a broud bused energy tux on the US economy: R. Boyd and N. D. Uri

and the indirect effects), such a tax increase is not, in general, regressive.

The government is the beneficiary of the Btu tax on energy at the point of consumption. As a result of the Btu tax, the government’s income increases leading to an increase in utility of0.897% or about $6.688 billion.

To summarize, the impact of a 10 cents/Btu x lo6 tax on energy imposed at the point of consumption will be a reduction in output by all producing sectors of 0.100% or about $5.988 billion, a reduction in output in the agricultural sectors of 0.002% or about $152 million, an increase in the consumption of goods and services by about 0.729% or $19.830 billion, a fall in total utility by 0.221% or $7.066 billion and increased revenue (from the Btu tax) for the government of $6.688 billion.

What would be the impact of imposing a somewhat larger tax of, say, 25 cents/Btu x lo6 on energy at the point of consumption? The pattern of the effects would be analogous to those observed with the 10 cents/ Btu x lo6 tax although the quantitative amount would be larger. Relative to the reference case, for example, for the producing sectors, output declines by 0.243% ($14549 billion). Sector specific impacts find output in the crude oil and natural gas sector declining by 0.547% ($720 million) and, in the petroleum refining sector, output would be reduced by 0.386% ($639 million). Output in the agricultural sectors would decline collectively by 0.006% ($253 million). The total consumption of goods and services increases by approximately 1.830% ($47.183 billion) - again due to the increase in consumption in the financial sector ~ while the consumption of electrical energy and natural gas (from the utilities sector) declines by 14.039% ($16.798 billion). Aggregate utility falls by 0.557% ($17.663 billion) with the decline evenly spread (in relative terms) across household categories. Govern- ment revenue increases by $16.703 billion over the reference case. This compares to the $6.688 billion increase associated with a 10 cents/Btu x lo6 tax.

One interesting feature of the results is that the point at which the Btu tax is imposed does have an identifiable impact on sectoral output and consumption. Using the 10 cents/Btu x lo6 tax as the point of reference, an examination of Tables 9, 10 and 11 will reveal that the tax imposed at the point of production will in general affect the producing sectors more than if it were imposed at the point of consumption. In fact, the aggregate reduction in output is nearly twice as great if the tax is imposed at the point of production than if it were imposed at the point of consumption. For the consuming sectors, on the other hand, the effect of where the tax is imposed is, in the aggregate, indistinguishable although some consuming sectors gain under one option while others gain under the

other option. The reduction in utility is more pronounced under the option where the tax is imposed at the point of consumption. Thus, total utility falls by almost 50% more when the tax is imposed at the point of consumption than it does when the tax is imposed at the point of production. Government revenue is virtually the same under the two options.

A comparison

How do the results obtained here compare with those obtained by others? Other recent available studies do not provide disaggregated (ie by producing and consuming sectors and by household categories) estimates of the impact of the imposition of a broad based Btu tax on energy. For the most part, they indicate aggregate values of expected revenue gains. Thus, for example, for a tax of 24 cents/Btu x 106, the Department of Energy [ 19871 provides an estimate of the gain in revenue to the government of $11 .l billion. (It is not clear from the analysis where the

Department of Energy imposes the Btu tax.) This compares to the $15- 16 billion increase obtained here. The Congressional Budget Office, on the other hand, estimates that a broad based energy tax of 5% (25 cents/Btu x 106) would raise $19 billion per year. (Again, it is not clear from the analysis where the tax is imposed.) This is somewhat larger than the estimate obtained here.

Sensitivity analysis

No analysis is complete without an examination of the sensitivity of the results to key assumptions. In the foregoing discussion, many assumptions were made with regard to model structure and parameter estimates. A full examination and discussion of these assumptions would be virtually impossible. Conse- quently, only the results from the sensitivity analysis of one crucial assumption will be discussed. Namely, what are the effects on the vector of equilibrium prices and quantities of the assumption concerning the elasticity of substitution of energy for other goods and services’? Recall that the original point estimates of these elasticities used in the model were 1.0 (ie the Cobb-Douglas case). In subsequent simulations, however, these were lowered for all goods and services to 0.5 and then raised to 1.5. In general, the effect of raising the elasticity of substitution is to magnify the influence of the Btu tax. The quantitative magnitude of the effect, however, on the results is minimal. Under both the strategy of imposing the tax at the point of production and imposing the tax at

the point of consumption, neither output nor consumption is affected by more than $100 million and in no



case is there any change in the qualitative results discussed above.

These sensitivity results suggest that the values of the substitution elasticities, while important in the determination of the vectors of general equilibrium prices and quantities and significant in determining the implications of a policy initiative affecting energy, are not so pivotal to the model that errors in their values lead to misleading and nonsensical results.

these elasticities, the fluctuations are not so enormous to suggest that the model is unrealistically sensitive to

these parameters.

Conclusion

The foregoing analysis has examined the impact of the imposition of a broad based energy tax on the US economy in general and the agricultural sectors in particular. The analytical approach used in the analysis consisted of a general equilibrium model composed of 12 producing sectors, 13 consuming sectors, six household categories classified by income and a government. The effects of a 10 cents/Btu x lo6 tax on energy on prices and quantities are examined. The results are revealing. For example, a 10 cents/ Btu x lo6 tax on energy imposed at the point of production would result in lower output by the producing sectors (by about $9.154 billion), an increase in the consumption of goods and services (by about $20.292 billion), and a reduction in welfare (by about $4.930 billion). The government would realize an increase in revenue of about $6.356 billion. In the case of the Btu tax being imposed at the point of consumption, there would be lower output by the producing sectors (by about $5.988 billion), an expansion in the consumption of goods and services (by about $19.830 billion), and a reduction in welfare (by about $7.066 billion). The government would realize an increase in revenue of $6.688 billion.

As a consequence of this analysis, the implications of the imposition of a Btu tax on energy are clear. Namely, while the federal government revenue will increase, the various producing sectors (in the aggregate) will be adversely impacted in terms of a reduction in output while the various consuming sectors will experience a cumulative rise in the consumption of goods and services. Moreover, social welfare (measured as utility in the model) will decline by almost one and one-half to two times the amount of the gain in revenue by the government for the Btu tax initiative. Finally, the point where the tax is imposed will make a difference in terms of its overall impact on the producing and consuming sectors of the economy.

References

1

2

3

4

5

The agricultural sectors would be minimally impacted. For example, if a 10 cents/Btu x lo6 tax is imposed at the point of production, output in the programme crops sector will rise (by $8.3 million), output in the livestock sector will decline (by $83 million), output in the all other agriculture commodities sector will be reduced (by $118 million), and output in the forestry sector will rise (by $34.7 million). If the Btu tax is imposed at the point of consumption, output in the programme crops sector will fall (by $38 million), output in the livestock sector will decline (by $42 million), output in the all other agriculture commodities sector will be reduced (by $94 million), and output in the forestry sector will rise (by $221 million).

6

I

Next, when subjected to a sensitivity analysis, the results are reasonably robust with regard to the assumption of the values of the substitution elasticities. That is, while the model’s equilibrium values do vary in response to different assumptions of the values of

8

9

10

11

12

13

P. C. Abbott, Foreign Exchange Constraints to Trade and Development, US Department of Agriculture, Washington, DC, 1984. K. J. Arrow, H. B. Chenery, B. S. Minhas and R. M. Solow, ‘Capital labour substitution and economic efficiency’, Review qf Economics and Statistics, Vol 43, 1961, pp 225-235. C. L. Ballard, D. Fullerton, J. B. Shoven and J. Whalley, A General Equilibrium Model for Tax Policy Evaluation, The University of Chicago Press, Chicago, 1985. A. M. Borges and L. H. Goulder, ‘Decomposing the impact of higher energy prices on long-term growth’, in H. E. Scarf and J. B. Shoven, eds, Applied General Equilibrium Analysis, Cambridge University Press, Cambridge, 1984. R. Boyd, The Direct and Indirect Effects of Tax R&orm on Agriculture, Technical Bulletin Number 1743, Economic Research Service, US Department of Agricul- ture, Washington, DC, February 1988. G. M. Brannon, Energy Taxes and Subsidies, Ballinger, Cambridge, 1974. Bureau of Labor Statistics, Consumer Expenditure Survey: Interview Survey, 1984, US Government Printing Office, Washington, DC, 1986. R. E. Caves and R. Jones, World Trade and Payments, 3rd edn, Little, Brown and Company, Boston, 1981. Congressional Budget Office, The Distributional Aspects of Selected Federal Income Taxes, CBO Staff Working Paper, Washington, DC, January 1987. Congressional Budget Office, Reducing the Deficit: Spending and Revenue Options, US Government Printing Office, Washington, DC, March 1988. Council of Economic Advisors, Economic Report ofthe President, US Government Printing Office. Washington, DC, 1990. M. R. Darby, ‘The price of oil and world inflation and recession’, American Economic Review, Vol 72, 1982, pp 738-751. A. Deaton and J. Muellbauer, Economics and Consumer Behavior, Cambridge University Press, Cambridge, 1980.

ENERGY ECONOMICS October 199 1 271

The impact qf a broad based energy tax on the US economy: R. Boyd and N. D. Uri

14

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Energy Information Administration, The Impact of Lower World Oil Prices and Alternative Energy Tax Proposals on the US Economy, Energy Information Administration, US Department of Energy, Washington, DC, 18 April 1986. L. S. Friedman, Microeconomic Policy Analysis, McGraw- Hill, New York, 1984. G. Gerardi and E. Toder, ‘Energy tax alternatives’, National Tax Journal, Vol 37, 1984, pp 289-301. A. Harberger, ‘The incidence of corporate taxation’, Journal of Political Economy, Vol70,1962, pp 215-240. A. Harberger, Taxation and Welfare, University of Chicago Press, Chicago, 1974. E. 0. Heady and J. L. Dillon, Agricultural Production Functions, Iowa State University Press, Ames, Iowa, 1961. T. W. Hertel and M. E. Tsigas, Tax Policy and US Agriculture: A General Equilibrium Analysis, Staff Paper No 87-2, Department of Agricultural Economics, Purdue University, West Lafayette, Indiana, February 1987. C. J. Hitch, ed, Modelling Energy-Economy Interactions: Five Approaches, Resources for the Future, Washington, DC, 1977. E. A. Hudson and D. Jorgenson, ‘Tax policy and energy conservation’, Testimony before the Committee on Finance, US Senate, 29 January 1974. E. A. Hudson and D. W. Jorgenson, ‘Energy policy and economic growth’, Bell Journal of Economics and Management Science, Vol 5, 1974, pp 461-514. E. A. Hudson and D. Jorgenson, ‘Tax policy and energy conservation’, Econometric Studies of US Energy Policy, North-Holland, Amsterdam, 1976. D. W. Jorgenson, ‘Econometric methods for applied general equilibrium analysis’, in H. E. Scarf and J. B. Shoven, eds, Applied General Equilibrium Analysis, Cambridge University Press, Cambridge, 1984. J. MacKinnon, ‘Comments’, in H. E. Scarf and J. B. Shoven, eds, Applied General Equilibrium Analysis, Cambridge University Press, Cambridge, 1984. A. S. Manne, ‘ETA: a model for energy technology assessment’, Bell Journal ofEconomics and Management Science, Vol 7, 1976, pp 379-406. A. S. Manne, ‘Comments’, in H. E. Scarf and J. B. Shoven, eds, Applied General Equilibrium Analysis, Cambridge University Press, Cambridge, 1984. L. Mathiesen, ‘Computational experience in solving equilibrium models by a sequence of linear complementary problems’, Operations Research, Vol 33, 1985, pp 1225-1250. L. Mathiesen, ‘Computation of economic equilibrium by a sequence of linear complementary problems’, Mathematical Programming Study, Vol 23, 1985. J. W. Mixon and N. D. Uri, Managerial Economics, Macmillan, New York, 1985. H. E. Scarf, ‘The approximation of fixed points of a continuous mapping’, SIAM Journal of Applied Math- ematics, Vol 15, 1967, pp 1328- 1343. J. A. Sharples and P. M. Dixit, Forces that Could Expand US Wheat Exports, US Department of Agricul- ture, Washington, DC, January 1988. J. B. Shoven and J. Whalley, ‘A general equilibrium calculation of the effects of differential taxation of income from capital in the US’, Journal of Public Economics, Vol 1, 1972, pp 281-322. T. Takayama and N. D. Uri, ‘A note on spatial and

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Appendix Empirical model

I Overall equilibrium by sector

rj + GE, + UM, = C,RAS,, + GD, + CDj + UX,

+ IN? (1)

C,SL, = CjDLj + GDL (2)

&SK, = CjDKj + GDK (3)

&SD, = CjDDj + GDD (4)

where

GDL= x,TL, (5)

GDK = CjTKj (6)

GDD = CjTDj

II Consumer goods and services

(7)

CDj = CiZji[ GCEj - TC,] (8)

C,RCS,, = GCEi (9)

C,RCS,, = SL, + SK, + SD, + TRN, - PIT, (10)

GC, = C,RCS,, - SAK + (1 - TAU,)(ZTA, - l)SL,

(11)

GC, = SL, + SK, + SD, + TRN, - PIT,

+ (1 - TAU,)(ZTA, - l)SL, (12)

TE = &(SL,ZTA,TAU, + SK,TAU, + SD,TAU,

- (Q, + TRN)) (13)

where 0, = SL,TAU, + SK,TAU, + SD,TAU, - PIT,

III Foreign sector balance

Xj( UMj(EMj/( 1 + EMI)) + UMj/( 1 + EMI))

= xj( UX, + FEj) (14)


the impact of a broad based energy tax on the us economy

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