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Estimates from a Consumer Demand System: Implications for the Incidence of Environmental Taxes

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Author Info
Sarah E. West
Roberton C. Williams III

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Abstract

Most studies suggest that environmental taxes are regressive, and thus are unattractive policy options. We consider the distributional effects of a gasoline tax increase using three welfare measures and under three scenarios for gas tax revenue use. To incorporate behavioral responses we use Consumer Expenditure Survey data to estimate a consumer demand system that includes gasoline, other goods, and leisure. We find that the gas tax is regressive, but that returning the revenue through a lump-sum transfer more than offsets this, yielding a net increase in progressivity. We also find that ignoring behavioral changes in distributional calculations overstates both the overall burden of the tax and its regressivity.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9152.

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Date of creation: Sep 2002
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Handle: RePEc:nbr:nberwo:9152

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  1. Cornwell, Antonia & Creedy, John, 1997. "Measuring the Welfare Effects of Tax Changes Using the LES: An Application to a Carbon Tax," Empirical Economics, Springer, vol. 22(4), pages 589-613.
  2. James M. Poterba, 1991. "Is the Gasoline Tax Regressive?," NBER Working Papers 3578, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Molly Espey, 1996. "Explaining the Variation in Elasticity Estimates of Gasoline Demand in the United States: A Meta-Analysis," The Energy Journal, International Association for Energy Economics, vol. 17(3), pages 49-60.
  4. 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)
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  5. Kayser, Hilke A., 2000. "Gasoline demand and car choice: estimating gasoline demand using household information," Energy Economics, Elsevier, vol. 22(3), pages 331-348, June. [Downloadable!] (restricted)
  6. Muellbauer, John, 1976. "Community Preferences and the Representative Consumer," Econometrica, Econometric Society, vol. 44(5), pages 979-99, September. [Downloadable!] (restricted)
  7. Suits, Daniel B, 1977. "Measurement of Tax Progressivity," American Economic Review, American Economic Association, vol. 67(4), pages 747-52, September. [Downloadable!] (restricted)
  8. West, Sarah E., 2004. "Distributional effects of alternative vehicle pollution control policies," Journal of Public Economics, Elsevier, vol. 88(3-4), pages 735-757, March. [Downloadable!] (restricted)
  9. Heckman, James J, 1979. "Sample Selection Bias as a Specification Error," Econometrica, Econometric Society, vol. 47(1), pages 153-61, January. [Downloadable!] (restricted)
  10. Sipes, Kristin N. & Mendelsohn, Robert, 2001. "The effectiveness of gasoline taxation to manage air pollution," Ecological Economics, Elsevier, vol. 36(2), pages 299-309, February. [Downloadable!] (restricted)
  11. Deaton, Angus S & Muellbauer, John, 1980. "An Almost Ideal Demand System," American Economic Review, American Economic Association, vol. 70(3), pages 312-26, June. [Downloadable!] (restricted)
  12. Muellbauer, John, 1975. "Aggregation, Income Distribution and Consumer Demand," Review of Economic Studies, Blackwell Publishing, vol. 42(4), pages 525-43, October. [Downloadable!] (restricted)
  13. Elizabeth Symons & John Proops & Philip Gay, 1994. "Carbon taxes, consumer demand and carbon dioxide emissions: a simulation analysis for the UK," Fiscal Studies, Institute for Fiscal Studies, vol. 15(2), pages 19-43, May. [Downloadable!]
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Don Fullerton, 2008. "Distributional Effects of Environmental and Energy Policy: An Introduction," NBER Working Papers 14241, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Eerola, Essi & Huhtala, Anni, 2005. "Promoting Demand for Organic Food Under Preference and Income Heterogeneity," 2005 International Congress, August 23-27, 2005, Copenhagen, Denmark 24664, European Association of Agricultural Economists. [Downloadable!]
  3. James Boyce & Matthew Riddle & Mark D Brenner, 2005. "A Chinese Sky Trust? Distributional Impacts of Carbon charges and Revenue Recycling in China," Working Papers wp_brenner_riddle_boyce, Political Economy Research Institute, University of Massachusetts at Amherst. [Downloadable!]
  4. Sarah E. West & Roberton C. Williams, 2005. "The Cost of Reducing Gasoline Consumption," American Economic Review, American Economic Association, vol. 95(2), pages 294-299, May. [Downloadable!]
  5. Ian Parry & Hilary Sigman & Margaret Walls & Roberton Williams, 2005. "The Incidence of Pollution Control Policies," Departmental Working Papers 200504, Rutgers University, Department of Economics. [Downloadable!]
    Other versions:
  6. Antonio M. Bento & Lawrence H. Goulder & Emeric Henry & Mark R. Jacobsen & Roger H. von Haefen, 2005. "Distributional and Efficiency Impacts of Gasoline Taxes: An Econometrically Based Multi-market Study," American Economic Review, American Economic Association, vol. 95(2), pages 282-287, May. [Downloadable!]
  7. Abdelkrim Araar & Yazid Dissou & Jean-Yves Duclos, 2008. "Household Incidence of Pollution Control Policies: a Robust Welfare Analysis Using General Equilibrium Effects," Cahiers de recherche 0809, CIRPEE. [Downloadable!]
    Other versions:
  8. Huhtala, Anni & Eerola, Essi, 2005. "Voting for environmental policy under income and preference heterogeneity," Discussion Papers 11863, MTT Agrifood Research Finland. [Downloadable!]
    Other versions:
  9. Ashokankur Datta, 2008. "The incidence of fuel taxation in India," Indian Statistical Institute, Planning Unit, New Delhi Discussion Papers 08-05, Indian Statistical Institute, New Delhi, India. [Downloadable!]
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