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Second-Best Pollution Taxes

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  • Don Fullerton

Abstract

When government needs more revenue than is available from a pollution tax rate equal to marginal environmental damage, our intuition tells us to raise the tax on the clean good above zero and to raise the tax on the dirty good above that first-best Pigouvian rate. Yet new results suggest that the second-best pollution tax is below the Pigouvian rate. This note reconciles these views by pointing out that these new results use a labor tax to acquire additional revenue, and that the labor tax is equivalent to a uniform tax on both clean and dirty goods. Thus, depending on the normalization, the total tax on the dirty good can be above the Pigouvian rate. These recent results are meant to show that the difference between the tax on the dirty good and the tax on the clean good is less than the Pigouvian rate. Any one tax rate can be set to zero as a conceptual matter, but implementation of some taxes might be easier than others as a practical matter.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5511.

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Date of creation: Mar 1996
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Publication status: published as Enviromenmental Levies and Distortionary Taxation: Comment," American Economic Review, Vol. 87, no. 1 (March 1997): 245-251.
Handle: RePEc:nbr:nberwo:5511

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  1. 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.
  2. Terkla, David, 1984. "The efficiency value of effluent tax revenues," Journal of Environmental Economics and Management, Elsevier, vol. 11(2), pages 107-123, June.
  3. Bovenberg, A.L. & Mooij, R.A. de, 1994. "Environmental levies and distortionary taxation," Open Access publications from Tilburg University urn:nbn:nl:ui:12-152985, Tilburg University.
  4. 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.
  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.
  6. 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.
  7. Parry Ian W. H., 1995. "Pollution Taxes and Revenue Recycling," Journal of Environmental Economics and Management, Elsevier, vol. 29(3), pages S64-S77, November.
  8. 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.
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Cited by:
  1. Ronnie Schöb, 1997. "Environmental Taxes and Pre-Existing Distortions: The Normalization Trap," International Tax and Public Finance, Springer, vol. 4(2), pages 167-176, May.
  2. Don Fullerton & Wenbo Wu, 1996. "Policies for Green Design," NBER Working Papers 5594, National Bureau of Economic Research, Inc.

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