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Environmental Taxes and Economic Welfare: The Welfare Cost of Gasoline Taxation in the U.S. 1959-1999

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  • Seung-Rae Kim

    (Woodrow Wilson School, Princeton University)

Abstract

The purpose of this paper is to provide reasonable estimates for the welfare cost of environmental tax reform in the U.S. economy. Unlike most previous studies that empirically evaluate the deadweight cost of taxation, the model employed here considers explicitly the joint allocation of leisure and commodity demands where the wage rate plays a role both as a form of income and as the price of leisure time. The estimated results of the consumer behavior model indicate that the existing U.S. gasoline tax regime has induced a decrease of gasoline consumption by approximately 4 percent over the period from 1959 to 1999, while the deadweight cost caused by the tax accounts just for about 0.08 percent of the consumer full income over the sample period 1959-1999. Moreover, in most years of the sample period, the measures of marginal deadweight cost of gasoline taxation (sample average 0.1882) are relatively small compared to those of labor taxation (sample average 0.2175). This implies a larger efficiency gain in the case of labor taxation in shifting from the existing distortionary taxation to lump sum taxation. These empirical results might suggest the modest possibility of social welfare gains from tax reforms that shift some of the burden of taxation off labor onto energy (e.g. gasoline).

Suggested Citation

  • Seung-Rae Kim, 2002. "Environmental Taxes and Economic Welfare: The Welfare Cost of Gasoline Taxation in the U.S. 1959-1999," Public Economics 0201003, EconWPA, revised 11 May 2004.
  • Handle: RePEc:wpa:wuwppe:0201003
    Note: Type of Document - Acrobat PDF; prepared on MS Word; pages: 20; figures: included. IJEE
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    References listed on IDEAS

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    More about this item

    Keywords

    Environmental taxes; double dividend hypothesis; gasoline taxation; non-separable labor supply effects; AI demand system; marginal deadweight cost;

    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
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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