The Elgar Guide to Tax Systems

The Elgar Guide to Tax Systems

Elgar original reference

Edited by Emilio Albi and Jorge Martinez-Vazquez

Tax systems have changed considerably in the past three decades. These fundamental changes have been the result of economic globalization, new political stances, and also of developments in public finance thought. The chapters in this volume offer a critical review of those changes from the perspectives of tax theory, policy and tax administration practice, and the political economy of taxation. The authors also consider what sort of reforms are worth undertaking in tax policy design, tax administration and enforcement, and the assignment of sub-national taxes.

Chapter 8: The Scale and Scope of Environmental Taxation

Agnar Sandmo

Subjects: economics and finance, public finance, law - academic, tax law and fiscal policy, politics and public policy, public policy

Extract

* Agnar Sandmo 1 INTRODUCTION One of the first lessons that new students of economics learn about the principles of public finance is that indirect or commodity taxes are harmful to the efficiency of the economy. The partial equilibrium analysis that forms the basis for this conclusion is a simple and compelling one: a commodity tax drives a wedge between the marginal cost of production (as represented by the supply curve) and the marginal consumer benefit (as represented by the demand curve). The tax therefore prevents the market mechanism from reaching the efficient equilibrium solution where marginal cost is equal to marginal benefit. In a later lesson the student may learn that there are exceptions to this rule. If there are negative externalities associated with the production or consumption of a particular commodity – the typical example being adverse effects on the quality of the environment – efficiency may in fact be improved by taxation. Suppose, for the sake of the argument, that the externality in question generates a positive difference between social and private marginal cost, while private and social marginal benefits coincide. The requirement for efficiency is that the social marginal cost of production should be equal to the social marginal benefit, which again is equal to the private marginal benefit: SMC 5 SMB 5 PMB. Suppose further that this market operates according to the principles of perfect competition except that the market prices with which producers and consumers are faced are allowed to differ. Producers, who are assumed to maximize...

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