Dirty Taxes: Corporate Taxes and Air Pollution

Abstract

In this paper, we examine the role of corporate taxes on air pollution. We use satellite data on nitrogen dioxide (NO2) levels to proxy for air pollution on a spatially detailed scale, and we exploit rich local business tax variation in Germany from 2008 to 2020. We find that a 1% increase in business taxes increases NO2 levels by 0.15%. Given the overall decline in air pollution, this shows that 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. In cross-sectional tests, we find that the positive tax-NO2 association is stronger when investments are more irreversible, firms are less flexible to adapt, and local industries are rather dirty. 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