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On green production taxes

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  • Edward Calthrop
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    Abstract

    Proposals are often made to tax goods which are environmentally damaging. Many such goods are consumed both directly by households and industry at large: for example, carbon-intensive fuel, waste water or congested road space. This paper adopts a tax-reform setting to evaluate such a policy. The welfare impact is shown to depend on an input-substitution effect and an output effect on final consumption, where the latter effect can be conveniently analysed via the standard concept of the marginal welfare cost of a commodity tax. Finally, it is shown that raising a production tax is welfare enhancing if the current tax is below marginal external cost and revenues are recycled via the commodity tax with the highest marginal welfare cost.

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    Bibliographic Info

    Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 158.

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    Date of creation: 01 May 2003
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    Handle: RePEc:oxf:wpaper:158

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    Related research

    Keywords: externality taxes; productive efficiency; tax reform;

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    1. 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.
    2. Cowan, Simon, 1998. "Water Pollution and Abstraction and Economic Instruments," Oxford Review of Economic Policy, Oxford University Press, Oxford University Press, vol. 14(4), pages 40-49, Winter.
    3. Ballard, Charles L. & Medema, Steven G., 1993. "The marginal efficiency effects of taxes and subsidies in the presence of externalities : A computational general equilibrium approach," Journal of Public Economics, Elsevier, Elsevier, vol. 52(2), pages 199-216, September.
    4. Schob, Ronnie, 1996. "Evaluating Tax Reforms in the Presence of Externalities," Oxford Economic Papers, Oxford University Press, vol. 48(4), pages 537-55, October.
    5. Mayeres, Inge & Proost, Stef, 2001. "Marginal tax reform, externalities and income distribution," Journal of Public Economics, Elsevier, Elsevier, vol. 79(2), pages 343-363, February.
    6. de Bovenberg, A Lans & Mooij, Ruud A, 1994. "Environmental Levies and Distortionary Taxation," American Economic Review, American Economic Association, American Economic Association, vol. 84(4), pages 1085-89, September.
    7. 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.
    8. Ahmad, Ehtisham & Stern, Nicholas, 1984. "The theory of reform and indian indirect taxes," Journal of Public Economics, Elsevier, Elsevier, vol. 25(3), pages 259-298, December.
    9. Edward Calthrop & Bruno De Borger & Stef Proost, 2003. "Tax reform for dirty intermediate goods: theory and an application to the taxation of freight transport," Energy, Transport and Environment Working Papers Series, Katholieke Universiteit Leuven, Centrum voor Economische Studiën, Energy, Transport and Environment ete0302, Katholieke Universiteit Leuven, Centrum voor Economische Studiën, Energy, Transport and Environment.
    10. 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.
    11. Newbery, David M., 1986. "On the desirability of input taxes," Economics Letters, Elsevier, Elsevier, vol. 20(3), pages 267-270.
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