Optimal environmental taxation and enforcement policy

Abstract

We study the optimal environmental taxation and enforcement policy when (i) the regulator does not know the firms' abatement costs, (ii) penalties for tax evasion are limited, and (iii) monitoring of pollution is costly. We show that the threat of being audited alter the usual firms' incentives to over-estimate their abatement costs. In particular, depending on the firms' abatement costs, the optimal policy may involve over or under-deterrence compared to the full information outcome. We then investigate the properties of a pollution standard. We show that this policy comes close to an environmental tax once the economic incentives of the accompanying enforcement policy are considered.

Second-best pollution taxes: revisited and revised

“…In a more realistic setting where a government uses pollution taxes to raise revenues, the equality of the optimal pollution tax with marginal environmental damages breaks down (Sandmo 1975). The reason is that with positive social costs of public funds, due to imperfections of existing tax systems on labour or capital, the government is tempted to raise revenues through pollution taxes which are different from the Pigouvian prescription (Bontems and Bourgeon 2005). Tullock (1967) was the first to propose that revenues from pollution taxes could be used to reduce the level of other taxes in the economy.…”

“…Furthermore, we assume that tax revenues contribute to the government's budget. Then, in line with Bontems and Bourgeon (2005), we also consider the indirect value of pollution taxes. Finally, in line with Yitzhaki (1979) and Polinsky and Shavell (1982), we assume that the cost of assessing and collecting pollution taxes is an increasing function of tax revenues.…”

“…This coefficient reflects the total (direct and indirect) social benefit of a unitary change in tax revenues net of administrative costs. The direct social benefit (Bontems and Bourgeon 2005). For completeness, we should elaborate upon the two implicit assumptions concerning the specification of the social welfare function in (4).…”

Taxes, Tradable Rights and Transaction Costs

“…Clearly, the environmental tax administration has to perform costly monitoring activities to ensure compliance and enforce tax payments (Bontems and Bourgeon, 2001). It is important to distinguish three different problems: tax evasion, tax avoidance and tax delinquency.…”

Efficient Committed Budget for Implementing Target Audit Probability for Many Inspectees

“…3 When randomized audits are desirable, the 4 Such models have been formulated to study financial audits, insurance claim investigations, environmental regulation / pollution control, multilateral treaty monitoring, deterrence theory / law enforcement, optimal tax policy / tax compliance, etc. For example, (a) financial audits: Chatterjee, Morton, and Mukherji [2006] and minor modifications of Newman, Patterson, and Smith [2001] and Patterson and Noel [2003]; (b) insurance claim investigations: Mookherjee and Png [1989] and Picard [1996]; (c) environmental regulation / pollution control: Bontems and Bourgeon [2005] and minor modification of Florens and Foucher [1999]; (d) multilateral treaty monitoring: minor modifications of Avenhaus, von Stengel, and Zamir [2002] and Hohzaki [2007]; (e) deterrence theory / law enforcement: Kaplow and Shavell [1994], Polinsky and Shavell [1998;2000], and Polinsky [2007]; (f) optimal tax policy / tax compliance: Border and Sobel [1987], Sanchez and Sobel [1993], Cremer and Gahvari [1995], Sansing [1993], Rhoades [1997;1999], Mills and Sansing [2000], and Feltham and Paquette [2002].…”