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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).

Suggested Citation

  • Bert Saveyn & Stef Proost, 2004. "Environmental Tax Reform with Vertical Tax Externalities in a Federal State," Energy, Transport and Environment Working Papers Series ete0404, KU Leuven, Department of Economics - Research Group Energy, Transport and Environment.
  • Handle: RePEc:ete:etewps:ete0404

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    Cited by:

    1. Kiuila, Olga & Peszko, Grzegorz, 2006. "Sectoral and macroeconomic impacts of the large combustion plants in Poland: A general equilibrium analysis," Energy Economics, Elsevier, vol. 28(3), pages 288-307, May.

    More about this item


    Tax Reform; Tax externality; Federalism; Tax Burden; Capital Mobility;

    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
    • R13 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General Equilibrium and Welfare Economic Analysis of Regional Economies
    • R53 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Public Facility Location Analysis; Public Investment and Capital Stock

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