Energy Tax Reform with Vertical Tax Externalities

Abstract:     
The paper is a general equilibrium analysis of an energy tax reform in a
federation. It gives us a tool to measure the welfare effects and the vertical tax externalities of the tax reform. Vertical tax externalities may arise when two government levels impose taxes on common tax bases. We show how the magnitude and sign of the vertical externality depend on the environmental goal, the tax-recycling scenario, the initial local and federal tax shares, and the size of the federation. Simulations illustrate the effects for a small European federation (e.g. Belgium) and a large federation (e.g. US).

Keywords: Tax Reform, Vertical tax Externality, Federalism

JEL Classifications: H23, H77

Working Paper Series