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Political Sustainability and the Design of Environmental Taxes

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  • Helmuth Cremer
  • Philippe De Donder
  • Firouz Gahvari

Abstract

This paper studies the issue of political support for environmental taxes. The environmental tax is determined by majority voting, given a refund rule that specifies the allocation of tax proceeds. The refund rule is chosen by a welfare-maximizing constitutional planner. We show that: (i) The equilibrium tax rate is increasing in the proportion of tax reductions based on wage incomes. (ii) If labor and capital income taxes are reduced in the same proportion, to keep the government's budget balanced, majority voting yields a rate of environmental taxation that is lower than the optimal (Pigouvian) level. (iii) To mitigate this negative bias, the government reduces wage taxes by a higher proportion than capital income taxes. (iv) The final outcome will either be the Pigouvian tax or else all reductions will be given in wage taxes. This depends on individuals' preferences for the polluting good as well as wage and capital income distributions.

Suggested Citation

  • Helmuth Cremer & Philippe De Donder & Firouz Gahvari, 2004. "Political Sustainability and the Design of Environmental Taxes," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 11(6), pages 703-719, November.
    • Handle: RePEc:kap:itaxpf:v:11:y:2004:i:6:p:703-719
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    Citations

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    Cited by:

    1. Alesina, Alberto & Passarelli, Francesco, 2014. "Regulation versus taxation," Journal of Public Economics, Elsevier, vol. 110(C), pages 147-156.
    2. Niels Anger & Christoph Böhringer & Andreas Lange, 2015. "The political economy of energy tax differentiation across industries: theory and empirical evidence," Journal of Regulatory Economics, Springer, vol. 47(1), pages 78-98, February.
    3. Bezin, Emeline, 2019. "The economics of green consumption, cultural transmission and sustainable technological change," Journal of Economic Theory, Elsevier, vol. 181(C), pages 497-546.
    4. Cremer, Helmuth & De Donder, Philippe & Gahvari, Firouz, 2008. "Political competition within and between parties: An application to environmental policy," Journal of Public Economics, Elsevier, vol. 92(3-4), pages 532-547, April.
    5. Anita Fajczak-Kowalska & Anna Misztal & Magdalena Kowalska, 2021. "Energy, Pollution, and Transport Taxes as Instruments of Sustainable Development of Manufacturing Enterprises in Emerging Economies in the European Union," European Research Studies Journal, European Research Studies Journal, vol. 0(2B), pages 724-742.
    6. Habla, Wolfgang & Roeder, Kerstin, 2017. "The political economy of mitigation and adaptation," European Economic Review, Elsevier, vol. 92(C), pages 239-257.
    7. Bernard, Sophie & Hotte, Louis & Winer, Stanley L., 2014. "Democracy, inequality and the environment when citizens can mitigate health consequences of pollution privately or act collectively," European Journal of Political Economy, Elsevier, vol. 34(C), pages 142-156.
    8. Aidt, Toke S., 2010. "Green taxes: Refunding rules and lobbying," Journal of Environmental Economics and Management, Elsevier, vol. 60(1), pages 31-43, July.
    9. Haiyang Shang & Fang Su & Serhat Yüksel & Hasan Dinçer, 2021. "Identifying the Strategic Priorities of the Technical Factors for the Sustainable Low Carbon Industry Based on Macroeconomic Conditions," SAGE Open, , vol. 11(2), pages 21582440211, May.
    10. Dieter Schmidtchen & Jenny Helstroffer & Christian Koboldt, 2021. "Regulatory failure and the polluter pays principle: why regulatory impact assessment dominates the polluter pays principle," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 23(1), pages 109-144, January.
    11. Divya Datt & Meeta Keswani Mehra, 2016. "Environmental Policy in a Federation with Special Interest Politics and Inter-Governmental Grants," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 64(4), pages 575-595, August.
    12. Habla, Wolfgang & Roeder, Kerstin, 2013. "Intergenerational aspects of ecotax reforms – An application to Germany," Journal of Environmental Economics and Management, Elsevier, vol. 66(2), pages 301-318.
    13. MacKenzie, Ian A. & Ohndorf, Markus, 2012. "Cap-and-trade, taxes, and distributional conflict," Journal of Environmental Economics and Management, Elsevier, vol. 63(1), pages 51-65.
    14. Cremer, Helmuth & Goulão, Catarina & Roeder, Kerstin, 2016. "Earmarking and the political support of fat taxes," Journal of Health Economics, Elsevier, vol. 50(C), pages 258-267.
    15. Roeder, Kerstin & Habla, Wolfgang, 2012. "The Political Sustainability of Germany's Environmental Tax Rate," VfS Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 62060, Verein für Socialpolitik / German Economic Association.
    16. George E. Halkos & Dimitra C. Kitsou, 2018. "Weighted location differential tax in environmental problems," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 20(1), pages 1-15, January.
    17. Yu‐Bong Lai, 2018. "The Feasibility of the Double‐Dividend Hypothesis in a Democratic Economy," Scandinavian Journal of Economics, Wiley Blackwell, vol. 120(1), pages 211-241, January.

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