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Income Taxation, Environmental Emissions, And Technical Progress

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  • Perroni, Carlo

Abstract

This paper examines the implications of environmental externalities for income tax design in a growing economy. We describe a model with endogenously generated knowledge, in which technical progress reduces the emissions generated by production activities. In this setting, the lack of internalization of environmental externalities results in an above-optimal long-run rate of growth and leads to an inefficient input mix. If emission taxes are infeasible, differential income tax sheltering of physical and knowledge investment can be effective as a second best remedy. Simulation results from a calibrated model, under a uniform specification of intertemporal and intratemporal substitution possibilities, indicate that the intertemporal allocative effects associated with environmental externalities could dominate intratemporal distortions ; hence, income tax reform could outperform indirect tax reform as a second-best Pigouvian instrument, and perform well in comparison with a first-best instrument, even in economies where environmental emissions are sectorally concentrated.
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Suggested Citation

  • Perroni, Carlo, 1995. "Income Taxation, Environmental Emissions, And Technical Progress," Economic Research Papers 268685, University of Warwick - Department of Economics.
  • Handle: RePEc:ags:uwarer:268685
    DOI: 10.22004/ag.econ.268685
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    Cited by:

    1. Walid Oueslati, 2013. "Short and Long-term Effects of Environmental Tax Reform," Working Papers 2013.09, Fondazione Eni Enrico Mattei.
    2. Hettich, Frank, 1995. "The consequences of environmental policy for economic growth: A numerical simulation of the transition path," Discussion Papers, Series II 266, University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy".

    More about this item

    Keywords

    Environmental Economics and Policy; Financial Economics;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • Q20 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - General

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