Pigou Meets Mirrlees: On the Irrelevance of Tax Distortions for the Second-Best Pigouvian Tax

Bas Jacobs and Ruud de Mooij

No 3342, CESifo Working Paper Series from CESifo

Abstract: This paper extends the Mirrlees (1971) model of optimal income redistribution with optimal corrective taxes to internalize consumption externalities. It is demonstrated that the optimal second-best tax on an externality-generating good should not be corrected for the marginal cost of public funds. The reason is that the marginal cost of public funds equals unity in the optimal tax system, since marginal distortions of taxation are equal to marginal distributional gains. The Pigouvian tax needs to be modified, however, if polluting commodities or environmental quality are more complementary to leisure than non-polluting commodities are.

Keywords: marginal cost of public funds; optimal environmental taxation; optimal redistribution; externalities (search for similar items in EconPapers)
JEL-codes: D62 H21 H23 (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

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Journal Article: Pigou meets Mirrlees: On the irrelevance of tax distortions for the second-best Pigouvian tax (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_3342

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