Dirty Taxes: Corporate Taxes and Air Pollution

Abstract

This paper examines the role of corporate taxes on air pollution. We use satellite data on nitrogen dioxide (NO2) levels and exploit local business tax variation in Germany over 2008-2020. We find that a 1% tax increase leads to 0.15% higher NO2 levels. Given the overall decline in air pollution, higher tax rates are an obstacle to the trend towards cleaner air. This increase in pollution can be explained by higher taxes preventing firms from shifting towards cleaner assets. Overall, through higher air pollution, corporate taxes appear to have negative welfare consequences beyond the effects on investment and resource allocation.

Keywords: Corporate Taxation, Air Pollution, Emissions JEL classification: H22, H25, H32, H22