Working Paper: NBER ID: w12070
Authors: Don Fullerton; Seungrae Kim
Abstract: Recent studies consider public R&D spending that affects abatement knowledge and endogenous growth, distortionary taxes that affect physical and human capital formation, pollution taxes that affect environmental degradation, and regeneration that restores natural capital. Our model combines all of those elements. We show how the combination affects results from each prior model, focusing on two parameters that represent the need for distorting taxes, and the productivity of abatement knowledge relative to pollution. First, either of these two extensions can reverse the prior finding that pollution tax revenue is more than enough to pay for public abatement R&D. Second, tax distortions and externalities substantially alter prior findings that the ratio of public to private capital is based only on output elasticities. Third, our dynamic model affects prior static findings about how other public spending "crowds out" provision of the environmental public good. Fourth, we show whether a greater need for public spending leads to greater increases in the distorting tax or pollution tax. Fifth, while prior research is optimistic that environmental regulation can boost economic growth, we show how it may increase or decrease the growth rate --even if it raises welfare.
Keywords: Environmental Investment; Distortionary Taxes; Endogenous Growth; Public R&D; Pollution Tax
JEL Codes: O41; Q20; H41; H23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| necessity of a distortionary tax (H31) | adequacy of pollution tax revenues (H23) |
| tax distortions and pollution externalities (H23) | optimal ratio of public to private capital (H44) |
| government spending on non-environmental public goods (H49) | provision of environmental public goods (H42) |
| greater need for public revenue (H69) | larger increases in income or pollution taxes (H23) |
| initial increases in income tax (H26) | subsequent increases in pollution tax (H23) |
| higher pollution taxes (H23) | economic growth (O49) |
| higher pollution taxes (H23) | welfare (I38) |