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Title:Pigou meets mirrlees: On the irrelevance of tax distortions for the second-best Pigouvian tax PDF Logo
Authors:Jacobs, Bas
de Mooij, Ruud A.
Issue Date:2011
Series/Report no.:CESifo working paper: Public Finance 3342
Abstract:This paper extends the Mirrlees (1971) model of optimal income redistribution with optimal corrective taxes to internalize consumption externalities. It is demonstrated that the optimal second-best tax on an externality-generating good should not be corrected for the marginal cost of public funds. The reason is that the marginal cost of public funds equals unity in the optimal tax system, since marginal distortions of taxation are equal to marginal distributional gains. The Pigouvian tax needs to be modified, however, if polluting commodities or environmental quality are more complementary to leisure than non-polluting commodities are.
Subjects:marginal cost of public funds
optimal environmental taxation
optimal redistribution
externalities
JEL:D62
H21
H23
Document Type:Working Paper
Appears in Collections:CESifo Working Papers, CESifo Group Munich

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