COSTS OF ENVIRONMENTALLY MOTIVATED TAXES IN THE PRESENCE OF OTHER TAXES: GENERAL EQUILIBRIUM ANALYSES

This paper employs analytical and numerical general equilibrium models to evaluate environmentally motivated tax policies, concentrating on whether the gross costs of these policies can be eliminated when revenues from the taxes are devoted to cuts in marginal income tax rates. Our analytical model shows that the prospects for a zero-or-negative-cost environmental tax reform depend on the magnitudes of prior inefficiencies in the relative taxation of labor and capital and on the extent to which reforms shift the tax burden from the more efficient (overtaxed) to the less efficient (undertaxed) factor. Numerical simulations indicate that the revenue-neutral substitution of BTU or gasoline taxes for typical income taxes usually entails positive gross costs to the economy. In the case of the gasoline tax, a significant tax-shiñing effect lowers the policy's gross costs. This explains the lower costs of the gasoline tax compared with the BTU tax, despite its narrower base. Under neither policy is tax shining substantial enough to eliminate the overall gross costs.