Advertisement

International Tax and Public Finance

, Volume 11, Issue 6, pp 703–719 | Cite as

Political Sustainability and the Design of Environmental Taxes

  • Helmuth Cremer
  • Philippe De Donder
  • Firouz Gahvari
Article

Abstract

This paper studies the issue of political support for environmental taxes. The environmental tax is determined by majority voting, given a refund rule that specifies the allocation of tax proceeds. The refund rule is chosen by a welfare-maximizing constitutional planner. We show that: (i) The equilibrium tax rate is increasing in the proportion of tax reductions based on wage incomes. (ii) If labor and capital income taxes are reduced in the same proportion, to keep the government's budget balanced, majority voting yields a rate of environmental taxation that is lower than the optimal (Pigouvian) level. (iii) To mitigate this negative bias, the government reduces wage taxes by a higher proportion than capital income taxes. (iv) The final outcome will either be the Pigouvian tax or else all reductions will be given in wage taxes. This depends on individuals' preferences for the polluting good as well as wage and capital income distributions.

environmental taxes Pigouvian tax political support majority voting 

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. Bös, D. (2000). "Earmarked Taxation: Welfare Versus Political Support," Journal of Public Economics 75, 439–462.Google Scholar
  2. Bovenberg, A. L. and F. van der Ploeg. (1994). "Environmental Policy, Public Finance and the Labor Market in a Second-Best World," Journal of Public Economics 55, 349–390.Google Scholar
  3. Boyer, M. and J. J. Laffont. (1998). "Toward a Political Theory of the Emergence of Environmental Incentive Regulation," Rand Journal of Economics 30, 137–157.Google Scholar
  4. Brett, C. and M. Keen. (2000). "Political Uncertainly and the Earmarking of Environmental Taxes," Journal of Public Economics 75, 315–340.Google Scholar
  5. Casamatta, G., H. Cremer and P. Pestieau. (2000). "Political Sustainability and the Design of Social Insurance," Journal of Public Economics 75, 341–364.Google Scholar
  6. Cremer, H., P. De Donder and F. Gahvari. (2004). "Taxes, Budgetary Rule and Majority Voting," Public Choice (forthcoming).Google Scholar
  7. Cremer, H. and F. Gahvari. (2001). "Second-Best Taxation of Emissions and Polluting Goods," Journal of Public Economics 80, 169–197.Google Scholar
  8. Cremer, H., F. Gahvari and N. Ladoux. (1998). "Externalities and Optimal Taxation," Journal of Public Economics 70, 343–364.Google Scholar
  9. Cremer, H., F. Gahvari and N. Ladoux. (2003). "Environmental Taxes with Heterogeneous Consumers: An Ap-plication to Energy Consumption in France," Journal of Public Economics 87, 2791–2815.Google Scholar
  10. De Donder, P. and J. Hendriks. (1998). "The Political Economy of Targeting," Public Choice 95, 177–200.Google Scholar
  11. Gans, J. S. and M. Smart. (1996). "Majority Voting with Single Crossing Preferences," Journal of Public Economics 59, 219–237.Google Scholar
  12. Goulder, L. H. (1995). "Environmental Taxation and the Double Dividend: A Reader's Guide," International Tax and Public Finance 2, 157–183.Google Scholar
  13. Laffont, J. J. (1996). "Industrial Policy and Politics," International Journal of Industrial Organization 14, 1–27.Google Scholar
  14. Marsiliani, L. and T. I. Renström. (2000). "Time Inconsistency in Environmental Policy: Tax Earmarking as a Commitment Solution," The Economic Journal 110, 123–138.Google Scholar
  15. Poterba, J. M. (1991). "Tax Policy to Combat Global Warming: On Designing a Carbon Tax," In R. Dornbusch and J. M. Poterba (eds.), Global Warming: Economic Policy Responses. Cambridge, MA: The MIT Press, pp. 71–98.Google Scholar
  16. Sandmo, A. (1975). "Optimal Taxation in the Presence of Externalities," Swedish Journal of Economics 77, 86–98.Google Scholar

Copyright information

© Kluwer Academic Publishers 2004

Authors and Affiliations

  • Helmuth Cremer
    • 1
  • Philippe De Donder
    • 1
  • Firouz Gahvari
    • 2
  1. 1.University of Toulouse (IDEI and GREMAQ)ToulouseFrance
  2. 2.Department of EconomicsUniversity of Illinois at Urbana-ChampaignUrbana

Personalised recommendations