The Case for a Two-Part Instrument: Presumptive Tax and Environmental Subsidy

39 Pages Posted: 27 Jun 2000 Last revised: 4 Apr 2008

See all articles by Don Fullerton

Don Fullerton

University of Illinois at Urbana-Champaign - Department of Finance; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute)

Maryann Wolverton

U.S. Environmental Protection Agency - National Center for Environmental Economics

Date Written: April 1997

Abstract

This paper builds two simple general equilibrium models to demonstrate the equivalence between the Pigovian tax and the combination of a presumptive tax and an environmental subsidy. A presumptive tax is a tax that is imposed under the presumption that all production uses a dirty technology or all consumption goods become waste. The environmental subsidy is then provided only to the extent that production uses a cleaner technology or that consumption goods are recycled. To analyze the usefulness of the tax-subsidy combination, we review conceptual considerations regarding its implementation and practical considerations regarding its actual use throughout the world. While the tax-subsidy combination is increasingly being used, in the form of a deposit-refund system, we argue that more flexible interpretations are important to explore. The two parts of such a policy do not have to apply to the same side of the market. The tax and subsidy do not have to equal one another, and they can apply to different goods altogether. Compared to the Pigovian tax, a two-part instrument may be easier to enforce, may be easier to enact, and can still force the market to recognize the social cost of disposal.

Suggested Citation

Fullerton, Don and Wolverton, Maryann (Ann), The Case for a Two-Part Instrument: Presumptive Tax and Environmental Subsidy (April 1997). NBER Working Paper No. w5993. Available at SSRN: https://ssrn.com/abstract=225772

Don Fullerton (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
(217) 244-3621 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Maryann (Ann) Wolverton

U.S. Environmental Protection Agency - National Center for Environmental Economics ( email )

Washington, DC 20460
United States

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