Pollution versus Inequality: Tradeoffs for Fiscal Policy

Camille Hainnaux () and Thomas Seegmuller
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Camille Hainnaux: Aix Marseille Univ, CNRS, AMSE, Marseille, France., https://www.amse-aixmarseille.fr/en/members/hainnaux

No 2221, AMSE Working Papers from Aix-Marseille School of Economics, France

Abstract: In this paper, we investigate the impact of redistribution and polluting commodity taxation on inequality and pollution in a dynamic setting. We build a two-sector Ramsey model with a green and a polluting good. Households are heterogeneous, which allows for income inequality, and have a level of subsistence consumption for the polluting commodity, modeled by non-homothetic preferences. Increasing the tax rate has a mixed effect depend on the level of subsistence consumption. A low level allows to tackle both the pollution and inequality issues. Under a high level of it, pollution increases: if inequality can be reduced through redistribution, taxation does not allow to solve for environmental degradation. Looking at the stability properties of the economy, we find that the level of subsistence consumption and the externality matter. A high subsistence level of polluting consumption leads to instability or indeterminacy of the steady-state, while the environmental externality plays a stabilizing role in the economy. This leaves room for taxation and redistribution: increasing the tax rate and redistributing more towards workers play a key role in the occurrence of indeterminacy and instability.

Keywords: externalities; heterogeneous agents; inequality; pollution; redistribution; taxation (search for similar items in EconPapers)
JEL-codes: E62 H23 Q52 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2022-09
New Economics Papers: this item is included in nep-dge, nep-env and nep-pub
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Working Paper: Pollution versus Inequality: Tradeoffs for Fiscal Policy (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:aim:wpaimx:2221

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