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Externalities and partial tax reform: Does it make sense to tax road freight (but not passenger) transport?

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  • CALTHROP, Edward
  • DE BORGER, Bruno
  • PROOST, Stef

Abstract

Externalities such as pollution and road congestion are jointly produced by the use of intermediate inputs by firms and the consumption of final goods by households. Remarkably, to cope with such externalities policy proposals often suggest very partial tax reforms. A pertinent example is the current EU proposal to introduce congestion taxes for freight transport on major roads while, for political or technical reasons, failing to similarly address passenger transport. This paper uses a simple general equilibrium model to explore the effects of such a partial tax reform in a second-best setting. The theoretical model shows that the welfare effect of higher freight taxes is positive, unless passenger transport is severely under-taxed and the tax reform attracts substantially more passenger transport. Moreover, the optimal freight tax may be below or above marginal external cost; the former holds if passenger transport is under-taxed and the freight tax does not strongly affect labour supply. Budgetary neutral tax reform exercises with a numerical simulation model for the UK suggest that, under a wide variety of parameter values, higher freight transport taxes are indeed welfare increasing. The welfare gain of freight tax reform rises with the level of the passenger tax, but the optimal freight tax declines at higher taxes on passenger transport. Substantial net benefits of tax reform are obtained only under labour tax recycling of the revenues.

Suggested Citation

  • CALTHROP, Edward & DE BORGER, Bruno & PROOST, Stef, "undated". "Externalities and partial tax reform: Does it make sense to tax road freight (but not passenger) transport?," Working Papers 2006017, University of Antwerp, Faculty of Applied Economics.
  • Handle: RePEc:ant:wpaper:2006017
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    References listed on IDEAS

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    1. Parry, Ian W. H. & Bento, Antonio, 2002. "Estimating the Welfare Effect of Congestion Taxes: The Critical Importance of Other Distortions within the Transport System," Journal of Urban Economics, Elsevier, vol. 51(2), pages 339-365, March.
    2. Small, Kenneth A. & Yan, Jia, 2001. "The Value of "Value Pricing" of Roads: Second-Best Pricing and Product Differentiation," Journal of Urban Economics, Elsevier, vol. 49(2), pages 310-336, March.
    3. Ian W. H. Parry & Kenneth A. Small, 2005. "Does Britain or the United States Have the Right Gasoline Tax?," American Economic Review, American Economic Association, vol. 95(4), pages 1276-1289, September.
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    6. Bruno De Borger & Stef Proost (ed.), 2001. "Reforming Transport Pricing in the European Union," Books, Edward Elgar Publishing, number 1822.
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    9. Parry, Ian W H & Bento, Antonio, 2001. " Revenue Recycling and the Welfare Effects of Road Pricing," Scandinavian Journal of Economics, Wiley Blackwell, vol. 103(4), pages 645-671, December.
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    Cited by:

    1. Parry, Ian W.H., 2008. "How should heavy-duty trucks be taxed?," Journal of Urban Economics, Elsevier, vol. 63(2), pages 651-668, March.
    2. Proost, Stef & De Borger, Bruno & Koskenoja, Pia, 2007. "Chapter 3 Public finance aspects of transport charging and investments," Research in Transportation Economics, Elsevier, vol. 19(1), pages 59-80, January.
    3. Carling, Kenneth & Håkansson, Johan & Meng, Xiangli & Rudholm, Niklas, 2015. "The effects of taxing truck distance on CO2 emissions from transports in retailing," HUI Working Papers 111, HUI Research.
    4. Parry, Ian & Strand, Jon, 2012. "International fuel tax assessment: an application to Chile," Environment and Development Economics, Cambridge University Press, vol. 17(02), pages 127-144, April.
    5. Guerrero, Sebastian E. & Madanat, Samer M. & Leachman, Robert C., 2013. "The Trucking Sector Optimization Model: A tool for predicting carrier and shipper responses to policies aiming to reduce GHG emissions," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 59(C), pages 85-107.
    6. Carling, Kenneth & Håkansson, Johan & Meng, Xiangli & Rudholm, Niklas, 2017. "The effect on CO2 emissions of taxing truck distance in retail transports," Transportation Research Part A: Policy and Practice, Elsevier, vol. 97(C), pages 47-54.
    7. Pérez-Martínez, P.J. & Vassallo-Magro, J.M., 2013. "Changes in the external costs of freight surface transport In Spain," Research in Transportation Economics, Elsevier, vol. 42(1), pages 61-76.
    8. Robin Lindsey, 2010. "Reforming Road User Charges: A Research Challenge For Regional Science," Journal of Regional Science, Wiley Blackwell, vol. 50(1), pages 471-492.

    More about this item

    Keywords

    Tax reform; Congestion; Transport pricing;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • R41 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - Transportation: Demand, Supply, and Congestion; Travel Time; Safety and Accidents; Transportation Noise
    • R48 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - Government Pricing and Policy

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