This paper analyses optimal corrective taxation and optimal income redistribution. The Pigouvian pollution tax is higher if pollution damages disproportionally hurt the poor due to equity weighting of pollution damages. Moreover, under general utility functions, optimal pollution taxes should be set below the Pigouvian tax if the poor spend a disproportionate fraction of their income on polluting goods. However, if Engel curves are linear, optimal pollution taxes should follow the first-best rule for the Pigouvian corrective tax even if the government wants to redistribute income and the poor spend a disproportional part of their income on polluting goods. The often-used quasi-linear, CES and Stone-Geary utility functions all have linear Engel curves. If Engel curves are linear, and if pollution taxes are not optimised, Pareto-improving green tax reforms exist that move the pollution tax closer to the Pigouvian tax. Simulations demonstrate that optimal corrective taxes should be Pigouvian if the demand for polluting goods is derived from a LES demand system, but deviate from the Pigouvian taxes if demand for polluting goods demand is derived from a PIGLOG demand system.

Additional Metadata
Keywords Redistributive taxation, Corrective pollution taxation, Engel curves, Gorman polar preferences, PIGLOG preferences, Green tax reform
JEL Efficiency; Optimal Taxation (jel H21), Externalities; Redistributive Effects; Environmental Taxes and Subsidies (jel H23), Climate; Natural Disasters; Global Warming (jel Q54)
Persistent URL hdl.handle.net/1765/121740
Journal Journal of Environmental Economics and Management
Citation
Jacobs, B, & Van der Ploeg, F. (2019). Redistribution and Pollution Taxes with Non-linear Engel-curves. Journal of Environmental Economics and Management, 95, 198–226. Retrieved from http://hdl.handle.net/1765/121740