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Environmental Tax Reform with Vertical Tax Externalities

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  • Bert Saveyn
  • Stef Proost

Abstract

The paper studies a regional environmental tax reform in a federal state. A region unilaterally improves the environmental quality by increasing its energy taxes. The regional government recycles the excess tax revenues by lowering either pre-existing distorting labor or capital taxes. This regional tax reform causes a vertical tax externality in the federal budget. We show how the nature of this externality depends on the environmental goal, the tax-recycling scenario, the initial local and federal tax shares, and the relative importance of the reforming region in the federal state. Simulations illustrate the effects for Belgium and US.

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File URL: http://www.econ.kuleuven.be/eng/ew/discussionpapers/Dps05/Dps0514.pdf
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Bibliographic Info

Paper provided by Katholieke Universiteit Leuven, Centrum voor Economische Studiën in its series Center for Economic Studies - Discussion papers with number ces0514.

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Date of creation: Mar 2005
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Handle: RePEc:ete:ceswps:ces0514

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Keywords: Tax Reform; Vertical Tax Externality; Federalism;

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