Environmental Levies and Distortionary Taxation: Pigou, Taxation, and Pollution

16 Pages Posted: 29 Sep 2000 Last revised: 19 Oct 2010

See all articles by Gilbert E. Metcalf

Gilbert E. Metcalf

Tufts University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: September 2000

Abstract

Bovenberg and de Mooij (1994) showed that, in the presence of preexisting distorting taxes, the optimal pollution tax typically lies below social marginal damages. Many have viewed this result as a refutation of the so-called double dividend hypothesis,' which suggests that a tax on pollution can both improve the environment and reduce distortions in the tax system. Bovenberg and de Mooij's paper triggered a large literature on optimal environmental tax rates in a second-best world. In this note, I argue that the emphasis on tax rates is misguided. Using an analytical general equilibrium model, I show that for reasonable parameter values, an increase in tax distortions (arising from an increase in required tax revenues) leads to a fall in the optimal Pigouvian tax rate even while environmental quality improves. In general, knowledge of the direction of changes in optimal environmental tax rates due to changes in the economy is not sufficient for understanding the impact on environmental quality.

Suggested Citation

Metcalf, Gilbert E., Environmental Levies and Distortionary Taxation: Pigou, Taxation, and Pollution (September 2000). NBER Working Paper No. w7917. Available at SSRN: https://ssrn.com/abstract=243642

Gilbert E. Metcalf (Contact Author)

Tufts University - Department of Economics ( email )

Medford, MA 02155
United States
617-627-3685 (Phone)
617-627-3917 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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