Corrective Taxation of a Consumption Externality in the Presence of an Optimal Non-linear Income Tax

Anneli Josefsson
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Anneli Josefsson: Ministry of Finance, Postal: SE-103 33 Stockholm, Sweden

No 1997:14, Working Paper Series from Uppsala University, Department of Economics

Abstract: This paper is concerned with the problem of combining a non-linear income tax with an indirect externality correcting tax. The analysis is performed in a model economy with two types of individuals and two types of consumption goods. The government wants to redistribute from the more able individuals to the less able, and also to correct for the externality arising from the total consumption of the dirty good. It turns out that the optimal tax structure depends on the complementarity or substitutability between the dirty good and leisure. The second-best externality correcting tax can be interpreted as consisting of a redistributive and an environmental component. Consequently, the dirt tax can be lower or higher than the first-best Pigouvian tax.

Keywords: Pareto efficient taxation; environmental externalities; commodity tax; Nonlinear income tax (search for similar items in EconPapers)
JEL-codes: D62 H21 H23 Q28 (search for similar items in EconPapers)
Pages: 38 pages
Date: 1997-07-15
New Economics Papers: this item is included in nep-env, nep-mic, nep-pbe and nep-pub
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