NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

NBER Working Papers by Inkee Hong

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Working Papers

July 1999A Tax on Output of the Polluting Industry is Not a Tax on Pollution: The Importance of Hitting the Target
with Don Fullerton, Gilbert E. Metcalf: w7259
We explore the effects of environmental taxes that imprecisely target pollution. A review of actual policies indicates few (if any) examples of a true tax on pollution. More typically, environmental taxes target an input or output that is correlated with pollution. We construct a simple analytical general equilibrium model to calculate the optimum tax rate on the input of the polluting industry, in terms of key behavioral parameters, and we compare this imprecisely-targeted tax to an ideal tax on pollution. Finally, we consider incremental tax reforms such as a change in either tax from some pre-existing level. Using a utility-based money-metric measure of welfare, we examine the losses that arise from not taxing pollution directly. With no existing tax, under our plausible parameter...

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