Environmental Tax Reform with Vertical Tax Externalities

Bert Saveyn and Stef Proost

Working Papers of Department of Economics, Leuven from KU Leuven, Faculty of Economics and Business (FEB), Department of Economics, Leuven

Abstract: 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.

Keywords: Tax Reform; Vertical Tax Externality; Federalism (search for similar items in EconPapers)
JEL-codes: H23 H77 (search for similar items in EconPapers)
Date: 2005-03
New Economics Papers: this item is included in nep-env and nep-pbe
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Persistent link: https://EconPapers.repec.org/RePEc:ete:ceswps:ces0514

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