A Nondistortionary Property of Environmental Taxes

Abstract

than other taxes, or less? In a reply to their pioneering paper, Bovenberg and de Mooij (1997, p. 252) wrote, [I]n the presence of distortionary taxes, environmental taxes tend to be more, rather than less, distortionary than other Possibly pointing in the other direction, Sandmo had earlier observed that, when the revenues from environmental taxes were just sufficient to finance by themselves the government's revenue need, first-best results could be obtalned with no distortionary costs of environmental taxes. However, the question remained open as to the distortionary properties of environmental taxes when there are other taxes and environmental taxes, by themselves, are insufficient to meet the revenue need. Dealing with this latter case, Kaplow as well as Fullerton and Metcalf found some nondistortionary properties of environmental taxes. This article identifies another nondistortionary property of environmental taxes, namely, that the corrective, Pigovian parts of environmental taxes have no corresponding Harberger triangles whether or not there are other taxes. (The result does not extend to proportional taxes on nonexternalities because it depends on a defining characteristic of externalities.) The nondistortionary property of missing Harberger triangles is shown for a very simple model, but it extends to more general settings in Page and Zhang (2003). The model is similar to ones by Sandmo, by Parry, by Bovenberg and de Mooij (1994), and more closely related to Kaplow and to Fullerton and Metcalf. This article differs from the above cited papers in identifying the miss-