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Should pollution taxes be targeted at income redistribution?

Frederick (Rick) van der Ploeg () and Bas Jacobs ()

No 191, OxCarre Working Papers from Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford

Abstract: This paper analyses optimal corrective taxation and optimal income redistribution. The Pigouvian pollution tax is higher if pollution damages disproportionally hurt the poor due to equity weighting of pollution damages. Moreover, optimal pollution taxes should be set below the Pigouvian tax if the poor spend a disproportionate fraction of their income on polluting goods if preferences for commodities are not of the Gorman (1961) polar form. However, optimal pollution taxes should follow the first-best rule for the Pigouvian corrective tax if preferences for commodities are of the Gorman polar form even if the government wants to redistribute income and the poor spend a disproportional part of their income on polluting goods. The often-used quasi-linear, CES and Stone-Geary utility functions all belong to the Gorman polar class. If pollution taxes are not optimized, Pareto-improving green tax reforms exist that move the pollution tax closer to the Pigouvian tax if preferences are Gorman polar. Simulations demonstrate that optimal corrective taxes should be Pigouvian if the demand for polluting goods is derived from a LES demand system, but optimal corrective taxes deviate from the Pigouvian taxes if demand for polluting goods demand is derived from a PIGLOG demand system.

Keywords: redistributive taxation; corrective pollution taxation; Gorman polar form; Stone-Geary preferences; PIGLOG preferences; green tax reform (search for similar items in EconPapers)
JEL-codes: H21 H23 Q54 (search for similar items in EconPapers)
Date: 2017-06-13
New Economics Papers: this item is included in nep-ene, nep-env, nep-pbe, nep-pub, nep-res and nep-upt
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Related works:
Working Paper: Should Pollution Taxes be Targeted at Income Redistribution? (2017) Downloads
Working Paper: Should Pollution Taxes Be Targeted At Income Redistribution? (2017) Downloads
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