Distortionary, Non-Distortionary, and Distributional Properties of Environmental Taxes: Extension of Sandmo’s Observation

Page, Talbot

and

Qinghua Zhang

We find a limited parallel between lump-sum taxes and environmental taxes. Corollary 2, which extends Sandmo’s observation, shows that appropriated corrective revenues have the same non-distortionary effects as lump-sum taxes, the result reducing to the original observation when the appropriated corrective revenues meet the revenue need and achieve first-best efficiency with other taxes set at zero. 

Corollary 1 finds that when the corrective part of environmental taxes is used as marginal damage compensation, the non-corrective part is distortionary and symmetric with ordinary proportional labor taxes in second-best equilibria. 

The extension of Sandmo’s observation suggests that environmental taxes may be among the least distortionary taxes in the tax system.