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Corrective Taxation of a Consumption Externality in the Presence of an Optimal Non-linear Income Tax

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  • Josefsson, Anneli

    (Ministry of Finance)

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    Abstract

    This paper is concerned with the problem of combining a non-linear income tax with an indirect externality correcting tax. The analysis is performed in a model economy with two types of individuals and two types of consumption goods. The government wants to redistribute from the more able individuals to the less able, and also to correct for the externality arising from the total consumption of the dirty good. It turns out that the optimal tax structure depends on the complementarity or substitutability between the dirty good and leisure. The second-best externality correcting tax can be interpreted as consisting of a redistributive and an environmental component. Consequently, the dirt tax can be lower or higher than the first-best Pigouvian tax.

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    Bibliographic Info

    Paper provided by Uppsala University, Department of Economics in its series Working Paper Series with number 1997:14.

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    Length: 38 pages
    Date of creation: 15 Jul 1997
    Date of revision:
    Handle: RePEc:hhs:uunewp:1997_014

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    Postal: Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden
    Phone: + 46 18 471 25 00
    Fax: + 46 18 471 14 78
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    Web page: http://www.nek.uu.se/
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    Related research

    Keywords: Pareto efficient taxation; environmental externalities; commodity tax; Nonlinear income tax;

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    References

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    1. Christiansen, Vidar, 1984. "Which commodity taxes should supplement the income tax?," Journal of Public Economics, Elsevier, vol. 24(2), pages 195-220, July.
    2. Bovenberg, A Lans & de Mooij, Ruud A, 1997. "Environmental Levies and Distortionary Taxation: Reply," American Economic Review, American Economic Association, vol. 87(1), pages 252-53, March.
    3. Bovenberg, A. L. & van der Ploeg, F., 1994. "Environmental policy, public finance and the labour market in a second-best world," Journal of Public Economics, Elsevier, vol. 55(3), pages 349-390, November.
    4. de Bovenberg, A Lans & Mooij, Ruud A, 1994. "Environmental Levies and Distortionary Taxation," American Economic Review, American Economic Association, vol. 84(4), pages 1085-89, September.
    5. 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.
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