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Optimal Environmental Taxation in the Presence of Other Taxes: General Equilibrium Analyses

AMERICAN ECONOMIC REVIEW, Vol. 86, No. 4, September 1996

Posted: 21 Apr 1998  

Lawrence H. Goulder

Stanford University - Department of Economics; National Bureau of Economic Research (NBER); Resources for the Future

A. Lans Bovenberg

Tilburg University - Center for Economic Research (CentER); Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

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Abstract

This paper employs analytical and numerical general equilibrium models to examine the optimal setting of environmental taxes in the presence of pre-existing distortionary taxes. Both models indicate, contrary to what several analysts have suggested, that the optimal environmental tax rate in this setting is less than the rate implied by the "Pigovian principle," which would equate the tax to the marginal environmental damage from pollution. Numerical results show that previous studies may have seriously overstated the size of the optimal carbon tax by disregarding pre-existing taxes, and that the optimal carbon tax can be negative when revenues from the tax are recycled in a lump-sum fashion.

JEL Classification: D62, H21, H23

Suggested Citation

Goulder, Lawrence H. and Bovenberg, A. Lans, Optimal Environmental Taxation in the Presence of Other Taxes: General Equilibrium Analyses. AMERICAN ECONOMIC REVIEW, Vol. 86, No. 4, September 1996. Available at SSRN: https://ssrn.com/abstract=4949

Lawrence H. Goulder (Contact Author)

Stanford University - Department of Economics ( email )

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A. Lans Bovenberg

Tilburg University - Center for Economic Research (CentER) ( email )

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Centre for Economic Policy Research (CEPR)

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