Optimal Environmental Taxation in the Presence of Other Taxes: General Equilibrium Analyses
Lawrence H. Goulder
Stanford University - Department of Economics; National Bureau of Economic Research (NBER); Resources for the Future
A. Lans Bovenberg
Tilburg University - Center for Economic Research (CentER); Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute for Economic Research)
AMERICAN ECONOMIC REVIEW, Vol. 86, No. 4, September 1996
This paper employs analytical and numerical general equilibrium models to examine the optimal setting of environmental taxes in the presence of pre-existing distortionary taxes. Both models indicate, contrary to what several analysts have suggested, that the optimal environmental tax rate in this setting is less than the rate implied by the "Pigovian principle," which would equate the tax to the marginal environmental damage from pollution. Numerical results show that previous studies may have seriously overstated the size of the optimal carbon tax by disregarding pre-existing taxes, and that the optimal carbon tax can be negative when revenues from the tax are recycled in a lump-sum fashion.
JEL Classification: D62, H21, H23
Date posted: April 21, 1998
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