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Income Taxation, Environmental Emissions and Technical Progress


  • Perroni, Carlo


This paper examines the implications of environmental externalities for income tax design in a growing economy. We describe a model with endogenously generated knowledge, in which technical progress reduces the emissions generated by production activities. In this setting, the lack of internalization of environmental externalities results in an above-optimal long-run rate of growth and leads to an inefficient input mix. If emission taxes are infeasible, differential income tax sheltering of physical and knowledge investment can be effective as a second best remedy. Simulation results from a calibrated model, under a uniform specification of intertemporal and intratemporal substitution possibilities, indicate that the intertemporal allocative effects associated with environmental externalities could dominate intratemporal distortions ; hence, income tax reform could outperform indirect tax reform as a second-best Pigouvian instrument, and perform well in comparison with a first-best instrument, even in economies where environmental emissions are sectorally concentrated.

Suggested Citation

  • Perroni, Carlo, 1995. "Income Taxation, Environmental Emissions and Technical Progress," The Warwick Economics Research Paper Series (TWERPS) 436, University of Warwick, Department of Economics.
  • Handle: RePEc:wrk:warwec:436

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    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • Q20 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - General


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