Distortionary, Non-Distortionary, and Distributional Properties of Environmental Taxes: Extension of Sandmo's Observation

Talbot Page and Qinghua Zhang
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Talbot Page: Dept. of Economics, Brown University
Qinghua Zhang: Dept. of Applied Economics, Guanghua School of Management, Peking University

Annals of Economics and Finance, 2006, vol. 7, issue 1, 157-183

Abstract: We find a limited parallel between lump-sum taxes and environmental taxes. Corollary 2, which extends Sandmo's observation, shows that appropriated corrective revenues have the same non-distortionary effects as lump-sum taxes, the result reducing to the original observation when the appropriated corrective revenues meet the revenue need and achieve first-best efficiency with other taxes set at zero. Corollary 1 finds that when the corrective part of environmental taxes is used as marginal damage compensation, the non-corrective part is distortionary and symmetric with ordinary proportional labor taxes in second-best equilibria. The extension of Sandmo¡¯s observation suggests that environmental taxes may be among the least distortionary taxes in the tax system.

Keywords: Environmental taxes; Pigovian taxes; Lindahl prices; Second-best taxes; Distortionary taxes; Lump-sum taxes (search for similar items in EconPapers)
JEL-codes: D58 D62 H23 L51 Q2 Q48 (search for similar items in EconPapers)
Date: 2006
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