TY  - JOUR
AU  - Fullerton,Don
AU  - Hong,Inkee
AU  - Metcalf,Gilbert E.
TI  - A Tax on Output of the Polluting Industry is Not a Tax on Pollution:  The Importance of Hitting the Target
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 7259
PY  - 1999
Y2  - July 1999
UR  - http://www.nber.org/papers/w7259
L1  - http://www.nber.org/papers/w7259.pdf
N1  - Author contact info:
Don Fullerton
Department of Finance
University of Illinois
BIF Box#30 (MC520)
515 East Gregory Drive
Champaign, IL  61820
Tel: 217/244-3621
Fax: 217/244-3102
E-Mail: dfullert@illinois.edu

Inkee Hong
E-Mail: ihong@eco.utexas.edu

Gilbert E. Metcalf
Department of Economics
Tufts University
Medford, MA 02155
1500 Pennsylvania Ave., NW
Tel: 617/627-3685
Fax: 617/627-3917
E-Mail: gilbert.metcalf@tufts.edu
M1  - published as Don Fullerton, Inkee Hong, Gilbert E. Metcalf. "A Tax on Output of the Polluting Industry Is Not a Tax on Pollution: The Importance of Hitting the Target," in Carlo Carraro and Gilbert E. Metcalf, editors, "Behavioral and Distributional Effects of Environmental Policy" University of Chicago Press (2001)

AB  - 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 parameters, the welfare gain from an output tax is less that half the gain from an emissions tax.
ER  -