Optimal Taxation, Redistribution, and Environmental Externalities

Thomas Aronsson () and Tomas Sjögren
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Thomas Aronsson: Department of Economics, Umeå University, Postal: Department of Economics, Umeå University, S 901 87 Umeå, Sweden, http://www.econ.umu.se

No 950, Umeå Economic Studies from Umeå University, Department of Economics

Abstract: This paper surveys research on optimal redistributive taxation in economies with environmental externalities. A major question is whether externality correction only motivates an adjustment of the tax policy rule for the externality-generating activity, or whether the marginal value of the externality directly enters the policy rules for other tax instruments as well. In a static benchmark model with an atmospheric consumption externality, where the government uses a mix of a nonlinear income tax and linear commodity taxes, we show that Sandmo’s (1975) additivity property applies. This means that externality correction leads to an additional term (measuring the marginal value of the externality) in the commodity tax formula for the externality generating good, while the policy rules for commodity taxation of clean goods and marginal income taxation take the same form as in the absence of any externality. We also extend this benchmark model to capture a number of scenarios (such as non-atmospheric externalities, border trade in the externality generating good, and competition between governments in a multi-country framework), where the additivity property no longer applies. We end by examining an intertemporal model of optimal taxation with a stock-externality, allowing us to integrate the study of optimal redistributive taxation with literature on environmental economics and policy based on dynamic models.

Keywords: Environmental externalities; optimal taxation; redistribution; income taxation; commodity taxation (search for similar items in EconPapers)
JEL-codes: D60 D62 H21 H23 Q51 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2017-06-19
New Economics Papers: this item is included in nep-des, nep-env, nep-pbe, nep-pub and nep-res
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Journal Article: Optimal Taxation, Redistribution, and Environmental Externalities (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:umnees:0950

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