TY  - JOUR
AU  - Metcalf,Gilbert E.
TI  - Environmental Levies and Distortionary Taxation: Pigou, Taxation, and Pollution
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 7917
PY  - 2000
Y2  - September 2000
UR  - http://www.nber.org/papers/w7917
L1  - http://www.nber.org/papers/w7917.pdf
N1  - Author contact info:
Gilbert E. Metcalf
Room 3221
Department of the Treasury
Washington, DC 20220
1500 Pennsylvania Ave., NW
Tel: 202-622-0173
E-Mail: gilbert.metcalf@tufts.edu
AB  - Bovenberg and de Mooij (1994) showed that, in the presence of preexisting distorting taxes, the optimal pollution tax typically lies below social marginal damages.  Many have viewed this result as a refutation of the so-called  double dividend hypothesis,' which suggests that a tax on pollution can both improve the environment and reduce distortions in the tax system.  Bovenberg and de Mooij's paper triggered a large literature on optimal environmental tax rates in a second-best world. In this note, I argue that the emphasis on tax rates is misguided.  Using an analytical general equilibrium model, I show that for reasonable parameter values, an increase in tax distortions (arising from an increase in required tax revenues) leads to a fall  in the optimal Pigouvian tax rate even while environmental quality improves. In general, knowledge of the direction of changes in optimal environmental tax rates due to changes in the economy is not sufficient for understanding the impact on environmental quality.
ER  -