Working Paper: CEPR ID: DP745
Authors: A Lans Bovenberg; Frederick van der Ploeg
Abstract: Environmental and tax policies and the optimal provision of clean and dirty public goods are analysed within the context of a second-best framework of optimal taxation. Households consume both clean and dirty commodities. Degradation of the natural environment occurs due to the consumption of dirty private and public goods, but can be offset when the government engages in abatement activities. The `double dividend' hypothesis, i.e. raise the dirt tax and reduce the labour tax in order to enhance both environmental quality and employment, fails. Increased environmental concern implies a higher dirt tax, a lower tax on labour, less employment and economic activity and a cleaner environment. If the elasticity of substitution between private consumption commodities and leisure is large, and that between clean and dirty goods is small, public consumption expands while private consumption contracts. Otherwise, public consumption falls.
Keywords: Environmental externalities; Clean and dirty goods; Dirt tax; Labour tax; Excess burden; Public goods; Optimal taxation; Double dividend; Second-best
JEL Codes: E60; H21; H41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increased environmental concern (F64) | higher dirt tax (H29) |
| increased environmental concern (F64) | lower labor tax (J89) |
| higher dirt tax and lower labor tax (H29) | less employment (J63) |
| higher dirt tax and lower labor tax (H29) | reduced economic activity (F69) |
| higher dirt tax (H29) | dirtier composition of public goods (H41) |
| higher overall tax levels (H29) | greater distortion in labor market (J79) |
| optimal response to increased environmental concern (Q52) | reduction in public consumption (H59) |