POLLUTION TAXES AND REVENUE RECYCLING

Discussions of environmental policy and the tax system have emphasized the value of pollution tax revenues, which can be used to reduce othe r tax distortions in the economy. However by raising private marginal production costs, environmental taxes also tend to reduce GDP and exac erbate the welfare costs of conventional taxes. For environmental taxe s in consumption goods industries, the net welfare change from these t wo effects is negative unless this good is a relatively weak substitut e for leisure. An estimate for the optimal pollution tax with full rev enue recycling is 63 to 78% of marginal environmental damages. (C) 199 5 Academic Press, Inc.