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Political Sustainability and the Design of Environmental Taxes

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Author Info
Helmuth Cremer ()
Philippe De Donder ()
Firouz Gahvari ()

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Abstract

This paper studies the issue of political support for environmental taxes. The environmental tax is determined by majority voting, given a refund rule that specifies the allocation of tax proceeds. The refund rule is chosen by a welfare-maximizing constitutional planner. We show that: (i) The equilibrium tax rate is increasing in the proportion of tax reductions based on wage incomes. (ii) If labor and capital income taxes are reduced in the same proportion, to keep the government's budget balanced, majority voting yields a rate of environmental taxation that is lower than the optimal (Pigouvian) level. (iii) To mitigate this negative bias, the government reduces wage taxes by a higher proportion than capital income taxes. (iv) The final outcome will either be the Pigouvian tax or else all reductions will be given in wage taxes. This depends on individuals' preferences for the polluting good as well as wage and capital income distributions. Copyright Kluwer Academic Publishers 2004

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Publisher Info
Article provided by Springer in its journal International Tax and Public Finance.

Volume (Year): 11 (2004)
Issue (Month): 6 (November)
Pages: 703-719
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Handle: RePEc:kap:apfinm:v:11:y:2004:i:6:p:703-719

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Web page: http://springerlink.metapress.com/link.asp?id=102851

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Related research
Keywords: environmental taxes; Pigouvian tax; political support; majority voting;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Bos, Dieter, 2000. "Earmarked taxation: welfare versus political support," Journal of Public Economics, Elsevier, vol. 75(3), pages 439-462, March. [Downloadable!] (restricted)
  2. Brett, Craig & Keen, Michael, 2000. "Political uncertainty and the earmarking of environmental taxes," Journal of Public Economics, Elsevier, vol. 75(3), pages 315-340, March. [Downloadable!] (restricted)
  3. Laffont, Jean-Jacques, 1996. "Industrial policy and politics," International Journal of Industrial Organization, Elsevier, vol. 14(1), pages 1-27. [Downloadable!] (restricted)
  4. Gans, Joshua S. & Smart, Michael, 1996. "Majority voting with single-crossing preferences," Journal of Public Economics, Elsevier, vol. 59(2), pages 219-237, February. [Downloadable!] (restricted)
  5. Casamatta, Georges & Cremer, Helmuth & Pestieau, Pierre, 2000. "Political sustainability and the design of social insurance," Journal of Public Economics, Elsevier, vol. 75(3), pages 341-364, March. [Downloadable!] (restricted)
  6. De Donder, Philippe & Hindriks, Jean, 1998. " The Political Economy of Targeting," Public Choice, Springer, vol. 95(1-2), pages 177-200, April. [Downloadable!] (restricted)
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  7. James M. Poterba, 1991. "Tax Policy to Combat Global Warming: On Designing a Carbon Tax," NBER Working Papers 3649, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Lawrence Goulder, 1995. "Environmental taxation and the double dividend: A reader's guide," International Tax and Public Finance, Springer, vol. 2(2), pages 157-183, August. [Downloadable!] (restricted)
  9. Marsiliani, Laura & Renstrom, Thomas I, 2000. "Time Inconsistency in Environmental Policy: Tax Earmarking as a Commitment Solution," Economic Journal, Royal Economic Society, vol. 110(462), pages C123-38, March. [Downloadable!] (restricted)
  10. Cremer, Helmuth & Gahvari, Firouz & Ladoux, Norbert, 1998. "Externalities and optimal taxation," Journal of Public Economics, Elsevier, vol. 70(3), pages 343-364, December. [Downloadable!] (restricted)
  11. Cremer, Helmuth & Gahvari, Firouz & Ladoux, Norbert, 2003. "Environmental taxes with heterogeneous consumers: an application to energy consumption in France," Journal of Public Economics, Elsevier, vol. 87(12), pages 2791-2815, December. [Downloadable!] (restricted)
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  12. Helmuth Cremer & Philippe De Donder & Firouz Gahvari, 2004. "Taxes, Budgetary Rule and Majority Voting," Public Choice, Springer, vol. 119(3_4), pages 335-358, 06. [Downloadable!]
  13. Cremer, Helmuth & Gahvari, Firouz, 2001. "Second-best taxation of emissions and polluting goods," Journal of Public Economics, Elsevier, vol. 80(2), pages 169-197, May. [Downloadable!] (restricted)
  14. Bovenberg, A Lans & van der Ploeg, Frederick, 1992. "Environmental Policy, Public Finance and the Labour Market in a Second-best World," CEPR Discussion Papers 745, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  1. Helmuth Cremer & Philippe De Donder & Firouz Gahvari, 2007. "Energy Taxes in Three Political Economy Models," Advances in Economic Analysis & Policy, Berkeley Electronic Press, vol. 7(1), pages 1707-1707. [Downloadable!] (restricted)
  2. Cremer, Helmuth & De Donder, Philippe & Gahvari, Firouz, 2005. "Political competition within and between parties: an application to environmental policy," CEPR Discussion Papers 5228, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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