The Taxation of Environmental Pollution: A Model for Tax Revenue-Environmental Quality Tradeoffs

Hung-Ming Peter Wu,Keith D Willett

doi:10.5430/ijfr.v8n1p65

Abstract

The paper analyzes the Willamette River in Oregon. Here a model (combining the least-cost model and the constraint method of multi-objective programming) is used to determine the appropriate tax rate on environmental externalities, incorporating both revenue and environmental quality objectives. The study finds the following. (1) By using the optimal tax rate, the appropriate tax revenue is determined. (2) The efficient solution set (including tax revenue and water quality considerations) is found by using differing optimal tax rates. (3) The optimal point (solution) in the efficient solution set is chosen by the geometrical argument approach and trade-off analysis approach.

Highlights

Economists have advocated environmental policies that are based on economic incentives
One important reason is based on the belief that environmental taxes, or “green taxes,” offer a “double dividend.”
The purpose of this paper is to develop a modeling structure that is used to determine the appropriate tax rate on environmental externalities, incorporating both revenue and environmental quality objectives

Summary

Introduction

Economists have advocated environmental policies that are based on economic incentives These policies can take many different forms, but perhaps the most widely discussed variant is based on the use of taxes (Baumol and Oates, 1988). As economists have long argued, appropriately defined taxes can efficiently restrain the levels of polluting activities These taxes generate revenues, allowing a reduction of rates on other forms of taxation throughout an economy that distort the functioning of the economy. The efficiency aspects of the double dividend argument for “green taxes” have been extensively reviewed and discussed by Oates (1993, 1995) These issues are beyond the scope of this paper. This paper focuses more directly on the role of tax revenue objectives and environmental quality objectives in the taxation of pollution

Objectives

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Results