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Tax evasion and optimal environmental taxes

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  • Liu, Antung Anthony
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    Abstract

    This paper introduces a new argument to the debate about the role of environmental taxes in modern tax systems. Some environmental taxes, particularly taxes on gasoline or electricity, are more difficult to evade than taxes on labor or income. When the tax base is shifted in a revenue-neutral manner toward these environmental taxes, the result is a net reduction in the amount of tax evasion. Using a carbon tax as a motivating example, the “tax evasion effect” is shown to sharply reduce the welfare cost of controlling emissions. A simple computable general equilibrium model suggests that the impact of considering tax evasion can be large: costs are lowered by 28% in the United States, by 89% in China, and by 97% in India. In countries with high levels of pre-existing tax evasion, a carbon tax will pay for itself through improvements in the efficiency of the tax system.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Environmental Economics and Management.

    Volume (Year): 66 (2013)
    Issue (Month): 3 ()
    Pages: 656-670

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    Handle: RePEc:eee:jeeman:v:66:y:2013:i:3:p:656-670

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    Web page: http://www.elsevier.com/locate/inca/622870

    Related research

    Keywords: Environmental regulation; Pigouvian tax; Tax evasion; Green tax swap; Tax interactions;

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    1. Gorodnichenko, Yuriy & Martinez-Vazquez, Jorge & Peter, Klara Sabirianova, 2007. "Myth and Reality of Flat Tax Reform: Micro Estimates of Tax Evasion Response and Welfare Effects in Russia," IZA Discussion Papers 3267, Institute for the Study of Labor (IZA).
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    5. Roberton C. Williams, 2000. "Environmental Tax Interactions When Pollution Affects Health or Productivity," NBER Working Papers 8049, National Bureau of Economic Research, Inc.
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    7. Parry, Ian & Bento, Antonio, 1999. "Tax deductions, environmental policy, and the"double dividend"hypothesis," Policy Research Working Paper Series, The World Bank 2119, The World Bank.
    8. Gordon, Roger & Li, Wei, 2009. "Tax structures in developing countries: Many puzzles and a possible explanation," Journal of Public Economics, Elsevier, Elsevier, vol. 93(7-8), pages 855-866, August.
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    10. Joseph E. Aldy & Alan J. Krupnick & Richard G. Newell & Ian W.H. Parry & William A. Pizer, 2009. "Designing Climate Mitigation Policy," NBER Working Papers 15022, National Bureau of Economic Research, Inc.
    11. Gordon Roger H., 2010. "Public Finance and Economic Development: Reflections based on Experience in China," Journal of Globalization and Development, De Gruyter, De Gruyter, vol. 1(1), pages 1-29, January.
    12. Bovenberg, A.L. & Goulder, L.H., 1996. "Optimal environmental taxation in the presence of other taxes: General equilibrium analyses," Open Access publications from Tilburg University, Tilburg University urn:nbn:nl:ui:12-73560, Tilburg University.
    13. Raymond Fisman & Shang-Jin Wei, 2004. "Tax Rates and Tax Evasion: Evidence from "Missing Imports" in China," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 112(2), pages 471-500, April.
    14. Cremer, Helmuth & Gahvari, Firouz, 1993. "Tax evasion and optimal commodity taxation," Journal of Public Economics, Elsevier, Elsevier, vol. 50(2), pages 261-275, February.
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    16. Parry Ian W. H., 1995. "Pollution Taxes and Revenue Recycling," Journal of Environmental Economics and Management, Elsevier, Elsevier, vol. 29(3), pages S64-S77, November.
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