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Costs of Environmentally Motivated Taxes in the Presence of Other Taxes:General Equilibrium Analyses

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  • A. Lans Bovenberg
  • Lawrence H. Goulder

Abstract

There has been keen interest in recent years in environmentally motivated or 'green' tax reforms. This paper employs analytical and numerical general equilibrium models to investigate the costs of such reforms, concentrating on the question of whether these costs can be eliminated when revenues from new environmental taxes are devoted to cuts in marginal income tax rates. A distinguishing feature of the analytical model is its attention to the role of pre-existing inefficiencies in the tax treatment of labor and capital and the associated role of tax-shifting. This model indicates how the prospects for a zero- or negative-cost environmental tax reform are enhanced to the extent that environmental tax reforms shift the tax burden toward the less efficient (undertaxed) factor. Results from the numerical model are interpreted in light of the analytical model's findings. These results indicate that the revenue- neutral substitution of Btu or gasoline taxes for typical income taxes usually entails positive gross costs to the economy. In the case of the gasoline tax, a significant tax shifting effect serves to lower the policy's gross costs. This accounts for the lower gross cost of the gasoline tax compared with the Btu tax. Under neither policy is tax-shifting substantial enough to eliminate the overall gross costs.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5117.

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Date of creation: May 1995
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Publication status: published as NTJ, Vol. 50, no. 1 (March 1997).
Handle: RePEc:nbr:nberwo:5117

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  1. A. Lans Bovenberg & Lawrence H. Goulder, 1994. "Optimal Environmental Taxation in the Presence of Other Taxes: General Equilibrium Analyses," NBER Working Papers 4897, National Bureau of Economic Research, Inc.
  2. Julio I. Rotemberg & Michael Woodford, 1994. "Energy Taxes and Aggregate Economic Activity," NBER Chapters, National Bureau of Economic Research, Inc, in: Tax Policy and the Economy, Volume 8, pages 159-195 National Bureau of Economic Research, Inc.
  3. Peter A. Diamond & J. A. Mirrlees, 1968. "Optimal Taxation and Public Production," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 22, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Bovenberg, A Lans & van der Ploeg, Frederick, 1992. "Environmental Policy, Public Finance and the Labour Market in a Second-best World," CEPR Discussion Papers, C.E.P.R. Discussion Papers 745, C.E.P.R. Discussion Papers.
  5. Lee, Dwight R. & Misiolek, Walter S., 1986. "Substituting pollution taxation for general taxation: Some implications for efficiency in pollutions taxation," Journal of Environmental Economics and Management, Elsevier, vol. 13(4), pages 338-347, December.
  6. Terkla, David, 1984. "The efficiency value of effluent tax revenues," Journal of Environmental Economics and Management, Elsevier, vol. 11(2), pages 107-123, June.
  7. Bovenberg, A.L. & Mooij, R.A. de, 1994. "Environmental levies and distortionary taxation," Open Access publications from Tilburg University, Tilburg University urn:nbn:nl:ui:12-152985, Tilburg University.
  8. Pearce, David W, 1991. "The Role of Carbon Taxes in Adjusting to Global Warming," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 101(407), pages 938-48, July.
  9. Bovenberg, A.L., 1995. "Environmental taxation and employment," Open Access publications from Tilburg University, Tilburg University urn:nbn:nl:ui:12-153065, Tilburg University.
  10. James M. Poterba, 1993. "Global Warming Policy: A Public Finance Perspective," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 7(4), pages 47-63, Fall.
  11. Bovenberg, A Lans & de Mooij, Ruud A, 1997. "Environmental Levies and Distortionary Taxation: Reply," American Economic Review, American Economic Association, American Economic Association, vol. 87(1), pages 252-53, March.
  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.
  13. Alan Manne & Richard Richels, 1992. "Buying Greenhouse Insurance: The Economic Costs of CO2 Emission Limits," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 026213280x, December.
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