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Environmental Tax Reform in a Federation with Rent-Induced Migration

Author

Listed:
  • Jean-Denis Garon

    (ESG-UQAM
    CESIfo and CIRANO)

  • Charles Séguin

    (ESG-UQAM
    CIREQ)

Abstract

We study the welfare effects of a revenue-neutral environmental tax reform in a federation. The reform consists of increasing a tax on a polluting input and reducing that on labor income. Households are fully mobile within the federation. Regions are unequally endowed with a nonrenewable natural resource. Resource rents are owned by regions and are redistributed to citizens on a residence basis, which generates a motive for inefficiently relocating to the resource-rich jurisdiction. Since the resource-poor region has a higher marginal product of labor than does the resource-rich region in equilibrium, the tax reform mitigates the scope of inefficient migration if labor and the natural resource are complements, but exacerbates it if they are substitutes. This welfare effect may significantly affect fiscal costs of pollution pricing and calls for an adjusted environmental tax, higher when inputs are complements, lower when they are substitutes, as compared with a model where migration is assumed away.

Suggested Citation

  • Jean-Denis Garon & Charles Séguin, 2021. "Environmental Tax Reform in a Federation with Rent-Induced Migration," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 78(3), pages 487-519, March.
    • Handle: RePEc:kap:enreec:v:78:y:2021:i:3:d:10.1007_s10640-021-00540-6
    DOI: 10.1007/s10640-021-00540-6
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    More about this item

    Keywords

    Federalism; Environment; Taxation; Equalization; Mobility; Externalities;
    All these keywords.

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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