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Distortionary, Non-Distortionary, and Distributional Properties of Environmental Taxes: Extension of Sandmo's Observation

  • Talbot Page

    (Dept. of Economics, Brown University)

  • Qinghua Zhang

    (Dept. of Applied Economics, Guanghua School of Management, Peking University)

Registered author(s):

    We find a limited parallel between lump-sum taxes and environmental taxes. Corollary 2, which extends Sandmo's observation, shows that appropriated corrective revenues have the same non-distortionary effects as lump-sum taxes, the result reducing to the original observation when the appropriated corrective revenues meet the revenue need and achieve first-best efficiency with other taxes set at zero. Corollary 1 finds that when the corrective part of environmental taxes is used as marginal damage compensation, the non-corrective part is distortionary and symmetric with ordinary proportional labor taxes in second-best equilibria. The extension of Sandmo¡¯s observation suggests that environmental taxes may be among the least distortionary taxes in the tax system.

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    Article provided by Society for AEF in its journal Annals of Economics and Finance.

    Volume (Year): 7 (2006)
    Issue (Month): 1 (May)
    Pages: 157-183

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    Handle: RePEc:cuf:journl:y:2006:v:7:i:1:p:157-183
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    1. repec:ner:tilbur:urn:nbn:nl:ui:12-152985 is not listed on IDEAS
    2. Don Fullerton & Gilbert E. Metcalf, 1997. "Environmental Controls, Scarcity Rents, and Pre-Existing Distortions," Discussion Papers Series, Department of Economics, Tufts University 9703, Department of Economics, Tufts University.
    3. Burtraw, Dallas & Parry, Ian & Goulder, Lawrence & Williams III, Roberton, 1998. "The Cost-Effectiveness of Alternative Instruments for Environmental Protection in a Second-Best Setting," Discussion Papers dp-98-22, Resources For the Future.
    4. 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.
    5. A. Lans Bovenberg & Lawrence H. Goulder, 2001. "Environmental Taxation and Regulation," NBER Working Papers 8458, National Bureau of Economic Research, Inc.
    6. Parry Ian W. H., 1995. "Pollution Taxes and Revenue Recycling," Journal of Environmental Economics and Management, Elsevier, vol. 29(3), pages S64-S77, November.
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