Special Papers Environmental Consideration in Tax Policy Design(1)

This paper discusses how environmental considerations will affect tax policy in the decades ahead. It argues that in the future, interactions between tax and environmental policy are likely to go well beyond recent discussion of double dividend issues and internalization of environmental externalities via tax policy will be the goal, which inevitably will involve the particular rather than the general. As a result, notions of neutrality which dominate current thinking on tax design will come under challenge; and in ways which will go well beyond current discussion of special treatment for particular goods and industries on environmental grounds. Special treatment of methods of production, more so than of goods, will be the name of the game. Moreover, the informational requirements of such an approach to tax policy are likely to be large. The paper concludes by pointing out that if environmental quality, as many suppose, is a luxury good with income elasticity of demand greater than one, then high income households will gain disproportionately from internalization of the externalities at issue. This may fuel pressures for more redistribution elsewhere in the tax system than is currently the case