Income Taxation, Environmental Emissions and Technical Progress

Carlo Perroni

The Warwick Economics Research Paper Series (TWERPS) from University of Warwick, Department of Economics

Abstract: This paper examines the implications of environmental externalities for income tax design in a growing economy. We describe a model with endogenously generated knowledge, in which technical progress reduces the emissions generated by production activities. In this setting, the lack of internalization of environmental externalities results in an above-optimal long-run rate of growth and leads to an inefficient input mix. If emission taxes are infeasible, differential income tax sheltering of physical and knowledge investment can be effective as a second best remedy. Simulation results from a calibrated model, under a uniform specification of intertemporal and intratemporal substitution possibilities, indicate that the intertemporal allocative effects associated with environmental externalities could dominate intratemporal distortions ; hence, income tax reform could outperform indirect tax reform as a second-best Pigouvian instrument, and perform well in comparison with a first-best instrument, even in economies where environmental emissions are sectorally concentrated.

JEL-codes: H21 O31 Q20 (search for similar items in EconPapers)
Pages: 27 pages
Date: 1995
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Citations: View citations in EconPapers (2)

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https://warwick.ac.uk/fac/soc/economics/research/w ... 95-1998/twerp436.pdf

Related works:
Working Paper: INCOME TAXATION, ENVIRONMENTAL EMISSIONS, AND TECHNICAL PROGRESS (1995)
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Persistent link: https://EconPapers.repec.org/RePEc:wrk:warwec:436

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