Environmental Taxation and Redistribution Concerns
42 Pages Posted: 23 Jul 2011 Last revised: 1 Jul 2014
Date Written: June 2013
Abstract
How is the optimal level of Pigouvian taxation influenced by distributive concerns? With second-best instruments, a higher level of income redistribution calls for a lower level of Pigouvian taxation. More redistribution implies higher distortions from income taxation. Pigouvian tax revenues become more valuable and the optimal level of environmental taxation decreases. With first-best instruments, however, the relation between levels of redistribution and Pigouvian taxation is reversed. So second-best Pigouvian taxes are very different from their first-best counterpart – despite apparently identical first order conditions.
Keywords: Optimal Income Taxation, Pigouvian taxation, comparative statics, externalities, second-best
JEL Classification: H21, D62, H23
Suggested Citation: Suggested Citation