Umeå Economic Studies,
Umeå University, Department of Economics

Abstract: In this paper, I consider environmental policy as part of a mixed tax problem with a general income tax and linear commodity taxes. I assume that the wage rate is determined by bargaining between unions and firms. The results show that the change in the number of employed persons, following a change in the use of a tax instrument, affects the optimal tax structure via two channels; (i) it makes the tax revenues available for public expenditures more or less costly to collect, and (ii) it affects the aggregate demand for the good that causes the environmental damage. This means that the use of taxation to counteract the labor market imperfection is not easily separated from the environmental aspects of tax policy. As a consequence, the so called 'additivity' property characterizing the commodity tax structure in previous studies does not apply.

Keywords: Optimal taxation; external effects; unemployment

JEL-codes: D62; H21; J60

32 pages, April 3, 2003

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