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Environmental Taxation and Redistribution Concerns

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  • Rafael Aigner

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    (Max Planck Institute for Research on Collective Goods, Bonn and University of Cologne)

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    Abstract

    This paper shows how the optimal level of Pigouvian taxation is influenced by distributive concerns. With second-best instruments, a higher level of income redistribution calls for a lower level of Pigouvian taxation. More redistributionimplies that tax collection via the income tax creates higher distortions, which in turn makes revenues from Pigouvian taxation more valuable. Contrary to naive intuition, this reduces the optimal level of Pigouvian taxation. The social planner trades off environmental tax revenues against the marginal social damage and accepts a lower tax if the welfare created per dollar is higher. The paper also shows that the relation between levels of redistribution and Pigouvian taxation is reversed in first-best. It thus highlights that second-best Pigouvian taxes are very different from their first-best counterpart – despite apparently identical first order conditions.

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    Bibliographic Info

    Paper provided by Max Planck Institute for Research on Collective Goods in its series Working Paper Series of the Max Planck Institute for Research on Collective Goods with number 2011_17.

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    Date of creation: Jul 2011
    Date of revision: Jun 2013
    Handle: RePEc:mpg:wpaper:2011_17

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    Keywords: Optimal Income Taxation; Pigouvian taxation; comparative statics; externalities; second-best;

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    1. Sebastian Rausch & Gilbert E. Metcalf & John M. Reilly, 2011. "Distributional Impacts of Carbon Pricing: A General Equilibrium Approach with Micro-Data for Households," NBER Working Papers 17087, National Bureau of Economic Research, Inc.
    2. Metcalf, Gilbert E., 1999. "A Distributional Analysis of Green Tax Reforms," National Tax Journal, National Tax Association, vol. 52(n. 4), pages 655-82, December.
    3. Craig Brett & John A. Weymark, 2008. "Public Good Provision And The Comparative Statics Of Optimal Nonlinear Income Taxation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 49(1), pages 255-290, 02.
    4. Stéphane Gauthier & Guy Laroque, 2009. "Separability and public finance," Post-Print hal-00731132, HAL.
    5. Bas Jacobs & Ruud A. de Mooij, 2011. "Pigou Meets Mirrlees: On the Irrelevance of Tax Distortions for the Second-Best Pigouvian Tax," CESifo Working Paper Series 3342, CESifo Group Munich.
    6. Sarah E. West, 2005. "Equity Implications of Vehicle Emissions Taxes," Journal of Transport Economics and Policy, London School of Economics and University of Bath, vol. 39(1), pages 1-24, January.
    7. Kopczuk, Wojciech, 2003. "A note on optimal taxation in the presence of externalities," Economics Letters, Elsevier, vol. 80(1), pages 81-86, July.
    8. Cremer, Helmuth & Gahvari, Firouz & Ladoux, Norbert, 1998. "Externalities and optimal taxation," Journal of Public Economics, Elsevier, vol. 70(3), pages 343-364, December.
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