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Taxing a Commodity with and without Revenue Neutrality: A Calibrated Theoretical Consumer Equilibrium Model

  • Frank Denton

    ()

  • Dean Mountain
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    It has long been recognized that taxing a commodity that generates negative externalities can be used to reduce its consumption. One way to do this is to impose revenue neutrality but that may alter the tax rate required to meet a consumption reduction target. We explore the relationships among the commodity tax rate, the demand and supply elasticities, and the revenue offsets by calibrating a theoretical consumer equilibrium model and then recalibrating it with alternative parameter configurations. For each configuration we simulate equilibrium for three policy scenarios: no neutrality, neutrality achieved by subsidizing other commodities, and neutrality achieved by income transfer. Copyright International Atlantic Economic Society 2011

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    File URL: http://hdl.handle.net/10.1007/s11293-011-9276-0
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    Article provided by Springer & International Atlantic Economic Society in its journal Atlantic Economic Journal.

    Volume (Year): 39 (2011)
    Issue (Month): 3 (September)
    Pages: 261-271

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    Handle: RePEc:kap:atlecj:v:39:y:2011:i:3:p:261-271
    DOI: 10.1007/s11293-011-9276-0
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    1. West, Sarah E. & Williams, R.C.Roberton III, 2004. "Estimates from a consumer demand system: implications for the incidence of environmental taxes," Journal of Environmental Economics and Management, Elsevier, vol. 47(3), pages 535-558, May.
    2. Nichele, Veronique & Robin, Jean-Marc, 1995. "Simulation of indirect tax reforms using pooled micro and macro French data," Journal of Public Economics, Elsevier, vol. 56(2), pages 225-244, February.
    3. Brännlund, Runar & Nordström, Jonas, 1999. "Carbon Tax Simulations Using a Household Demand Model," Umeå Economic Studies 508, Umeå University, Department of Economics.
    4. Deaton, Angus S & Muellbauer, John, 1980. "An Almost Ideal Demand System," American Economic Review, American Economic Association, vol. 70(3), pages 312-26, June.
    5. 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.
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