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Health effects and optimal environmental taxes in welfare state countries

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Author Info
Jean-Christophe Caffet () (EUREQua)
Abstract

Most studies on the green tax reform issue point out that environmental taxes exacerbate pre-existing tax distortions, thereby increasing the welfare costs associated with the overall tax code. As a result, the optimal environmental tax should lie below the Pigovian level (or marginal social damages). This article challenges this finding by arguing that health benefits from reduced pollution may sufficiently affect labor supply to create benefit-side tax interactions which, in turn, may be of the same magnitude as cost-side ones. Using a simple general equilibrium model that assumes the existence of a social security system, this paper shows that the optimal environmental tax rate could be greater than traditionally thought.

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File URL: ftp://mse.univ-paris1.fr/pub/mse/cahiers2005/V05049.pdf
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Publisher Info
Paper provided by Université Panthéon-Sorbonne (Paris 1) in its series Cahiers de la Maison des Sciences Economiques with number v05049.

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Length: 22 pages
Date of creation: Jul 2005
Date of revision:
Handle: RePEc:mse:wpsorb:v05049

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Related research
Keywords: Environmental tax; double dividend; employment; health; social security.;

Find related papers by JEL classification:
D60 - Microeconomics - - Welfare Economics - - - General
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy

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  1. Ronnie Schöb, 2003. "The Double Dividend Hypothesis of Environmental Taxes: A Survey," Working Papers 2003.60, Fondazione Eni Enrico Mattei. [Downloadable!]
    Other versions:
  2. A. Bovenberg, 1999. "Green Tax Reforms and the Double Dividend: an Updated Reader's Guide," International Tax and Public Finance, Springer, vol. 6(3), pages 421-443, August. [Downloadable!] (restricted)
  3. 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. [Downloadable!] (restricted)
  4. Harrington, Winston & Portney, Paul R., 1987. "Valuing the benefits of health and safety regulation," Journal of Urban Economics, Elsevier, vol. 22(1), pages 101-112, July. [Downloadable!] (restricted)
  5. Parry, Ian & Bento, Antonio, 1999. "Tax Deductible Spending, Environmental Policy, and the "Double Dividend" Hypothesis," Discussion Papers dp-99-24, Resources For the Future. [Downloadable!]
  6. Jesse Schwartz & Robert Repetto, 2000. "Nonseparable Utility and the Double Dividend Debate: Reconsidering the Tax-Interaction Effect," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 15(2), pages 149-157, February. [Downloadable!] (restricted)
  7. Lawrence H. Goulder, 1994. "Environmental Taxation and the "Double Dividend:" A Reader's Guide," NBER Working Papers 4896, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Lawrence H. Goulder & Ian W.H. Parry & Dallas Burtraw, 1997. "Revenue-Raising versus Other Approaches to Environmental Protection: The Critical Significance of Preexisting Tax Distortions," RAND Journal of Economics, The RAND Corporation, vol. 28(4), pages 708-731, Winter. [Downloadable!] (restricted)
  9. Ian Parry, 1998. "A Second-Best Analysis of Environmental Subsidies," International Tax and Public Finance, Springer, vol. 5(2), pages 153-170, May. [Downloadable!] (restricted)
  10. A. Lans Bovenberg & Lawrence H. Goulder, 1995. "Costs of Environmentally Motivated Taxes in the Presence of Other Taxes:General Equilibrium Analyses," NBER Working Papers 5117, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  11. Williams III, Roberton C., 2003. "Health effects and optimal environmental taxes," Journal of Public Economics, Elsevier, vol. 87(2), pages 323-335, February. [Downloadable!] (restricted)
  12. Parry Ian W. H., 1995. "Pollution Taxes and Revenue Recycling," Journal of Environmental Economics and Management, Elsevier, vol. 29(3), pages S64-S77, November. [Downloadable!] (restricted)
  13. Terkla, David, 1984. "The efficiency value of effluent tax revenues," Journal of Environmental Economics and Management, Elsevier, vol. 11(2), pages 107-123, June. [Downloadable!] (restricted)
  14. Sarah E. West & Roberton C. Williams, 2004. "Empirical Estimates for Environmental Policy Making in a Second-Best Setting," NBER Working Papers 10330, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  15. Bovenberg, A Lans & Goulder, Lawrence H, 1996. "Optimal Environmental Taxation in the Presence of Other Taxes: General-Equilibrium Analyses," American Economic Review, American Economic Association, vol. 86(4), pages 985-1000, September. [Downloadable!] (restricted)
    Other versions:
  16. Goulder, Lawrence H. & Parry, Ian W. H. & Williams III, Roberton C. & Burtraw, Dallas, 1999. "The cost-effectiveness of alternative instruments for environmental protection in a second-best setting," Journal of Public Economics, Elsevier, vol. 72(3), pages 329-360, June. [Downloadable!] (restricted)
    Other versions:
  17. Parry, Ian & Goulder, Lawrence & Williams III, Roberton, 1997. "When Can Carbon Abatement Policies Increase Welfare? The Fundamental Role of Distorted Factor Markets," Discussion Papers dp-97-18-rev, Resources For the Future. [Downloadable!]
    Other versions:
  18. Bovenberg, A. Lans & van der Ploeg, Frederick, 1996. "Optimal taxation, public goods and environmental policy with involuntary unemployment," Journal of Public Economics, Elsevier, vol. 62(1-2), pages 59-83, October. [Downloadable!] (restricted)
  19. Williams, Roberton III, 2002. "Environmental Tax Interactions when Pollution Affects Health or Productivity," Journal of Environmental Economics and Management, Elsevier, vol. 44(2), pages 261-270, September. [Downloadable!] (restricted)
    Other versions:
  20. 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. [Downloadable!] (restricted)
  21. Pearce, David W, 1991. "The Role of Carbon Taxes in Adjusting to Global Warming," Economic Journal, Royal Economic Society, vol. 101(407), pages 938-48, July. [Downloadable!] (restricted)
  22. Goulder, Lawrence H., 1994. "Environmental Taxation and the "Double Dividend": A Reader's Guide," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich.
  23. 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)
    Other versions:
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