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, under general utility functions, optimal pollution taxes should be set below the Pigouvian tax if the poor spend a disproportionate fraction of their income on polluting goods. However, if Engel curves are linear, optimal pollution taxes should follow the first-best rule for the Pigouvian corrective tax 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 have linear Engel curves. If Engel curves are linear, and if pollution taxes are not optimised, Pareto-improving green tax reforms exist that move the pollution tax closer to the Pigouvian tax. Simulations demonstrate that optimal corrective taxes should be Pigouvian if the demand for polluting goods is derived from a LES demand system, but deviate from the Pigouvian taxes if demand for polluting goods demand is derived from a PIGLOG demand system.
| Original language | English |
|---|---|
| Pages (from-to) | 198-226 |
| Number of pages | 29 |
| Journal | Journal of Environmental Economics and Management |
| Volume | 95 |
| Early online date | 13 Feb 2019 |
| DOIs | |
| Publication status | Published - May 2019 |
Funding
We thank Diane Aubert, Lans Bovenberg, Sijbren Cnossen, Moritz Drupp, David Klenert, Linus Mattauch, Gerard van der Meijden, Ian Parry, Erik Verhoef, the editor Till Requate and two anonymous referees for helpful comments. We are grateful to the helpful comments of participants at the Workshop on Climate Change and Distribution, organised by ESOP and Centre for the Study of Mind in Nature in collaboration with the Stanford Centre for Ethics in Society, Oslo, June 2010, the EAERE Conference, Prague, 2012 and Athens, 2017, the ifo Workshop on Heterogenous Agents and the Macroeconomics of Climate Change, Munich, December 2018, and various seminars. We acknowledge support from the ERC Advanced Grant \u2018Political Economy of Green Paradoxes\u2019 (FP7-IDEAS-ERC Grant No. 269788). This paper originally circulated under the title: \u201CShould Pollution Taxes be Targeted at Income Redistribution?\u201D.
| Funders | Funder number |
|---|---|
| Seventh Framework Programme | 269788 |
Keywords
- Corrective pollution taxation
- Engel curves
- Gorman polar preferences
- Green tax reform
- PIGLOG preferences
- Redistributive taxation
