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Environmental Tax Reform with Vertical Tax Externalities in a Federal State

  • Bert Saveyn

    ()

    (K.U.Leuven-Center for Economic Studies)

  • Stef Proost

    ()

    (K.U.Leuven-Center for Economic Studies)

The paper studies a regional environmental tax reform in a federal state. In a model with immobile labour, mobile capital and mobile polluting input in the production function, one region increases its pollution taxes and recycles the excess tax revenues by lowering either pre-existing distorting labour or capital taxes. This choice determines whether the non-environmental efficiency of the regional tax system improves or gets worse. Moreover, the regional tax reform changes the level of the federal budget through the vertical tax externality effect. We illustrate the magnitude of the different effects with simulations for a country with only 2 regions (Belgium) and a country with 50 regions (US).

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Paper provided by Katholieke Universiteit Leuven, Centrum voor Economische Studiƫn, Energy, Transport and Environment in its series Energy, Transport and Environment Working Papers Series with number ete0404.

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Length: 24 pages
Date of creation: May 2004
Date of revision:
Handle: RePEc:ete:etewps:ete0404
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