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Externalities And Partial Tax Reform: Does It Make Sense To Tax Road Freight (But Not Passenger) Transport?

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  • Edward Calthrop
  • Bruno De Borger
  • Stef Proost

Abstract

Externalities such as pollution and road congestion are jointly produced by the use of intermediate inputs by firms and the consumption of final goods by households. To cope with such externalities, policy proposals often suggest partial tax reforms. This paper uses a simple general equilibrium model to explore the effects of a reform of taxes on freight transport in a second-best setting. The theoretical model shows that the welfare effect of higher freight taxes is positive, unless passenger transport is severely under-taxed and the tax reform attracts substantially more passenger transport. Moreover, the optimal freight tax may be below or above marginal external cost. Budgetary neutral tax reform exercises with a numerical simulation model for the U.K. suggest that, under a wide variety of parameter values, higher freight transport taxes are indeed welfare increasing. The welfare gain of freight tax reform rises with the level of the passenger tax, but the optimal freight tax declines at higher taxes on passenger transport. Substantial net benefits of tax reform are obtained only under labor tax recycling of the revenues. Copyright Blackwell Publishing, Inc. 2007

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Journal of Regional Science.

Volume (Year): 47 (2007)
Issue (Month): 4 ()
Pages: 721-752

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Handle: RePEc:bla:jregsc:v:47:y:2007:i:4:p:721-752

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-4146

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  1. Parry, Ian W.H. & Bento, Antonio Miguel R., 1999. "Revenue recycling and the welfare effects of road pricing," Policy Research Working Paper Series 2253, The World Bank.
  2. De Borger B., 2006. "Commuting, congestion tolls and noncompetitive labour markets: optimal congestion pricing in a wage bargaining model," Working Papers 2006014, University of Antwerp, Faculty of Applied Economics.
  3. Small, Kenneth & Yan, Jia, 2000. "The Value of "Value Pricing" of Roads: Second-Best Pricing and Product Differentiation," Discussion Papers dp-00-08, Resources For the Future.
  4. Parry, Ian & Bento, Antonio, 2000. "Estimating the Welfare Effect of Congestion Taxes: The Critical Importance of Other Distortions within the Transport System," Discussion Papers dp-00-51, Resources For the Future.
  5. Verhoef, Erik & Nijkamp, Peter & Rietveld, Piet, 1996. "Second-Best Congestion Pricing: The Case of an Untolled Alternative," Journal of Urban Economics, Elsevier, vol. 40(3), pages 279-302, November.
  6. Blundell, Richard & Macurdy, Thomas, 1999. "Labor supply: A review of alternative approaches," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 27, pages 1559-1695 Elsevier.
  7. Kenneth A. Small & Clifford Winston & Jia Yan, 2005. "Uncovering the Distribution of Motorists' Preferences for Travel Time and Reliability," Econometrica, Econometric Society, vol. 73(4), pages 1367-1382, 07.
  8. Ian W. H. Parry & Kenneth A. Small, 2005. "Does Britain or the United States Have the Right Gasoline Tax?," American Economic Review, American Economic Association, vol. 95(4), pages 1276-1289, September.
  9. Richard Arnott, 2001. "The Economic Theory of Urban Traffic Congestion: A Microscopic Research Agenda," Boston College Working Papers in Economics 502, Boston College Department of Economics.
  10. Parry Ian W. H., 1995. "Pollution Taxes and Revenue Recycling," Journal of Environmental Economics and Management, Elsevier, vol. 29(3), pages S64-S77, November.
  11. Small, Kenneth A., 2001. "The Value of Pricing," University of California Transportation Center, Working Papers qt0rm449sx, University of California Transportation Center.
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Cited by:
  1. Parry, Ian & Strand, Jon, 2010. "International Fuel Tax Assessment: An Application to Chile," Discussion Papers dp-10-07, Resources For the Future.
  2. Parry, Ian W.H., 2006. "How Should Heavy-Duty Trucks Be Taxed?," Discussion Papers dp-06-23, Resources For the Future.
  3. Pérez-Martínez, P.J. & Vassallo-Magro, J.M., 2013. "Changes in the external costs of freight surface transport In Spain," Research in Transportation Economics, Elsevier, vol. 42(1), pages 61-76.

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