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Environmental Tax Reform with Vertical Tax Externalities


  • Bert Saveyn
  • Stef Proost


The paper studies a regional environmental tax reform in a federal state. A region unilaterally improves the environmental quality by increasing its energy taxes. The regional government recycles the excess tax revenues by lowering either pre-existing distorting labor or capital taxes. This regional tax reform causes a vertical tax externality in the federal budget. We show how the nature of this externality depends on the environmental goal, the tax-recycling scenario, the initial local and federal tax shares, and the relative importance of the reforming region in the federal state. Simulations illustrate the effects for Belgium and US.

Suggested Citation

  • Bert Saveyn & Stef Proost, 2005. "Environmental Tax Reform with Vertical Tax Externalities," Working Papers Department of Economics ces0514, KU Leuven, Faculty of Economics and Business, Department of Economics.
  • Handle: RePEc:ete:ceswps:ces0514

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    Tax Reform; Vertical Tax Externality; Federalism;

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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