Trade, Environment and Income Inequality: An Optimal Taxation Approach

Philippe Bontems () and Estelle Gozlan
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Philippe Bontems: TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique

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Abstract: In a small open economy, how should a government pursuing both environmental and redistributive objectives design domestic taxes when redistribution is costly? And how does trade liberalization affect the economy's levels of pollution and inequalities, when taxes are optimally and endogenously adjusted? Using a general equilibrium model under asymmetric information with two goods, two factors (skilled and unskilled labor), and pollution, this paper characterizes the optimal mixed tax system (nonlinear income tax and linear commodity and production taxes/subsidies) with both production and consumption externalities. While optimal income taxes are not directly affected by environmental externalities, conditions are derived under which under- or over-internalization of social marginal damage is optimal for redistributive considerations. Assuming that redistribution operates in favor of the unskilled workers and that the dirty sector is intensive in unskilled labor, simulations suggest that trade liberalization involves a clear trade-off between the reduction of inequalities and the control of pollution when the source of externality is only production; this is not necessarily true with a consumption externality. Finally, an increase in the willingness to redistribute income toward the unskilled results paradoxically in less pollution and more income inequalities.

Keywords: Environnement; Inégalités de revenu; international trade; environmental control; modèle d'équilibre général; asymétrie d'information; inégalité des richesses; commerce international; taxation optimale; protection de l'environnement (search for similar items in EconPapers)
Date: 2018
New Economics Papers: this item is included in nep-env, nep-pbe and nep-res
Note: View the original document on HAL open archive server: https://hal.science/hal-01702525v1
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Citations: View citations in EconPapers (4)

Published in Journal of Public Economic Theory, 2018, 20 (4), pp.1-25. ⟨10.1111/jpet.12288⟩

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Journal Article: Trade, environment, and income inequality: An optimal taxation approach (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01702525

DOI: 10.1111/jpet.12288

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