Budget Structure and Pollution Control

Abstract:     
The differences in environmental performance among countries have been mainly explained by Environmental Kuznets Curve (EKC), borrowed from the classic Kuznets Curve, which relates the distribution of income to the level of income. EKC states that in the early stage of economic growth, pollution increases. Once GDP per capita achieves certain level, the relationship reverses. We in this paper try to provide competitive hypotheses that the budget structures play important roles in explaining the variations in pollution level across the world. The reason is that pollution level can influence both revenue and expenditure sides of a government budget.

Hypothesis I: Higher proportion of tax revenue collected from business related taxes give government weaker incentives to protect environment quality. Therefore, higher ratio of business related taxes over total tax revenue would result in lower effort of pollution control and higher pollution level.

Hypothesis II: Higher proportion of tax revenue collected from property tax gives government stronger incentives to protect environment quality. Therefore, higher ratio of property tax over total tax revenue will result in higher effort of pollution control and lower pollution level.

Hypothesis III: A fuller assignment of expenditure responsibilities on health gives government stronger incentives to protect environment quality. Therefore, the higher the ratio of public health expenditure over total expenditure, the stronger incentive of pollution control and the lower the pollution level.

The empirical findings show that the budget structure does have important impact on pollution control. The policy implications are, if we want to control environmental pollution, we need to do some changes in tax structure and expenditure assignment.

Number of Pages in PDF File: 25

Keywords: Budget Structure, Incentives, Pollution Control

JEL Classification: H30, E61, Q58

working papers series