Research Discussion Papers, Bank of Finland
Earmarking of Environmental Taxes: Efficient, After All
Abstract: The paper analyses the benefits of earmarking the
environmental tax revenues in a second-best world with asymmetry of
information between government and taxpayers. Taxpayers are assumed to have
taste differences over consumption of an environmentally harmful activity.
The government, which cannot observe these preferences, pursues
Pareto-efficient taxation involving compensation to the potential losers of
tax policy. Within this framework, it is shown that earmarking
environmental tax revenues on projects that are beneficial to the losers of
the environmental policy may alleviate problems concerning asymmetric
information and facilitate more efficient environmental policy.
Keywords: environmental taxation; earmarked taxes; Pareto-efficient taxation; second-best analysis; (follow links to similar papers)
JEL-Codes: H20; H23; (follow links to similar papers)
35 pages, April 13, 1998
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