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


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 


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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

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