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A Tax on Output of the Polluting Industry Is Not a Tax on Pollution: The Importance of Hitting the Target

In: Behavioral and Distributional Effects of Environmental Policy

  • Don Fullerton
  • Inkee Hong
  • Gilbert E. Metcalf

We explore the effects of environmental taxes that imprecisely target pollution. A review of actual policies indicates few (if any) examples of a true tax on pollution. More typically, environmental taxes target an input or output that is correlated with pollution. We construct a simple analytical general equilibrium model to calculate the optimum tax rate on the input of the polluting industry, in terms of key behavioral parameters, and we compare this imprecisely-targeted tax to an ideal tax on pollution. Finally, we consider incremental tax reforms such as a change in either tax from some pre-existing level. Using a utility-based money-metric measure of welfare, we examine the losses that arise from not taxing pollution directly. With no existing tax, under our plausible parameters, the welfare gain from an output tax is less that half the gain from an emissions tax.

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This chapter was published in:
  • Carlo Carraro & Gilbert E. Metcalf, 2001. "Behavioral and Distributional Effects of Environmental Policy," NBER Books, National Bureau of Economic Research, Inc, number carr01-1, August.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 10604.
    Handle: RePEc:nbr:nberch:10604
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
    Phone: 617-868-3900
    Web page: http://www.nber.org
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    1. Bovenberg, A.L. & Goulder, L.H., 1996. "Optimal environmental taxation in the presence of other taxes : General equilibrium analyses," Other publications TiSEM 5d4b7517-c5c8-4ef6-ab76-3, Tilburg University, School of Economics and Management.
    2. Don Fullerton & Gilbert Metcalf, 1997. "Environmental Controls, Scarcity Rents, and Pre-Existing Distortions," NBER Working Papers 6091, National Bureau of Economic Research, Inc.
    3. Metcalf, Gilbert E. & Dudek, Daniel J. & Willis, Cleve E., 1984. "Cross-Media Transfers Of Hazardous Wastes," Northeastern Journal of Agricultural and Resource Economics, Northeastern Agricultural and Resource Economics Association, vol. 13(2), October.
    4. 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.
    5. Don Fullerton, 1996. "Why Have Separate Environmental Taxes?," NBER Chapters, in: Tax Policy and the Economy, Volume 10, pages 33-70 National Bureau of Economic Research, Inc.
    6. Lawrence H. Goulder & Ian W.H. Parry & Dallas Burtraw, 1997. "Revenue-Raising versus Other Approaches to Environmental Protection: The Critical Significance of Preexisting Tax Distortions," RAND Journal of Economics, The RAND Corporation, vol. 28(4), pages 708-731, Winter.
    7. C. William Maughan & Robert J. Townsley, 1999. "What is a Good?," Journal of Interdisciplinary Economics, , vol. 10(2), pages 91-105, April.
    8. Lawrence H. Goulder & Roberton C. Williams III, 1999. "The Usual Excess-Burden Approximation Usually Doesn't Come Close," NBER Working Papers 7034, National Bureau of Economic Research, Inc.
    9. Cropper, Maureen L & Oates, Wallace E, 1992. "Environmental Economics: A Survey," Journal of Economic Literature, American Economic Association, vol. 30(2), pages 675-740, June.
    10. 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.
    11. Devlin, R.A. & Grafton, R.Q., 1993. "Tradeable Permits, Missing Markets, and Technology," Working Papers 9301e, University of Ottawa, Department of Economics.
    12. Schmutzler, Armin & Goulder, Lawrence H., 1997. "The Choice between Emission Taxes and Output Taxes under Imperfect Monitoring," Journal of Environmental Economics and Management, Elsevier, vol. 32(1), pages 51-64, January.
    13. Agnar Sandmo & David Wildasin, 1999. "Taxation, Migration, and Pollution," International Tax and Public Finance, Springer, vol. 6(1), pages 39-59, February.
    14. Don Fullerton & Andrew Leicester & Stephen Smith, 2008. "Environmental Taxes," NBER Working Papers 14197, National Bureau of Economic Research, Inc.
    15. Don Fullerton & Gilbert E. Metcalf, 1997. "Environmental Taxes and the Double Dividends Hypothesis: Did You Really Expect Something for Nothing?," Discussion Papers Series, Department of Economics, Tufts University 9706, Department of Economics, Tufts University.
    16. Bovenberg, A.L. & van der Ploeg, F., 1993. "Optimal taxation, public goods and environmental policy with involuntary unemployment," Discussion Paper 1993-77, Tilburg University, Center for Economic Research.
    17. Thomas A. Barthold, 1994. "Issues in the Design of Environmental Excise Taxes," Journal of Economic Perspectives, American Economic Association, vol. 8(1), pages 133-151, Winter.
    18. Hahn, Robert W, 1989. "Economic Prescriptions for Environmental Problems: How the Patient Followed the Doctor's Orders," Journal of Economic Perspectives, American Economic Association, vol. 3(2), pages 95-114, Spring.
    19. Parry Ian W. H., 1995. "Pollution Taxes and Revenue Recycling," Journal of Environmental Economics and Management, Elsevier, vol. 29(3), pages S64-S77, November.
    20. Lawrence H. Goulder & Ian W. H. Parry & Dallas Burtraw, 1996. "Revenue-Raising vs. Other Approaches to Environmental Protection: The Critical Significance of Pre-Existing Tax Distortions," NBER Working Papers 5641, National Bureau of Economic Research, Inc.
    21. Lawrence Goulder, 1995. "Environmental taxation and the double dividend: A reader's guide," International Tax and Public Finance, Springer, vol. 2(2), pages 157-183, August.
    22. Bovenberg, A Lans & de Mooij, Ruud A, 1997. "Environmental Levies and Distortionary Taxation: Reply," American Economic Review, American Economic Association, vol. 87(1), pages 252-53, March.
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