Green Taxes: Can We Protect the Environment and Improve the Tax System at the Same Time?
On a cursory inspection, public economics appears to provide a straightforward and compelling answer of YES to the question posed in the title to this paper. As economists have long argued, appropriately designed taxes can, in principle at least, efficiently restrain levels of polluting activities. And, in addition, such taxes will generate revenues so that we can reduce rates on other forms of taxation that distort the functioning of the economy. Green taxes, in short, promise a double dividend: they can both reduce excessive levels of pollution and increase the efficiency of the overall tax system. At least, so several economists have argued recently [17; 20]. But is this really so? With the growing recognition of the enormous revenue potential of certain environmental taxes (especially carbon taxes to address the problem of global warming), public economists have returned to this question with a new round of research efforts directed both to understanding the properties of pollution taxes as revenue sources and to estimating their revenue potential and the magnitude of their on the economy. And the newly emerging literature is producing some quite astonishing and very troubling findings.' In this paper, I want to review this work and explore its implications. When viewed in relation to some other research, it appears to suggest that most forms of regulatory activity (at least those that increase the costs of the regulated activities) may have hitherto unappreciated costs of a stunning magnitude. What many of us would have taken to be second-order side effects of environmental and other regulatory policies can be of a magnitude that compromises to a significant extent their welfare-enhancing properties. Having reviewed this body of work, I wish also to explore some issues in the political economy of green taxes. It is helpful to begin by briefly putting the issue in historical perspective.