Political sustainability and the design of environmental taxes

Helmuth Cremer, Philippe De Donder, Firouz Gahvari

Research output: Contribution to journalArticlepeer-review


This paper studies the issue of political support for environmental taxes. The environmental tax is determined by majority voting, given a refund rule that specifies the allocation of tax proceeds. The refund rule is chosen by a welfare-maximizing constitutional planner. We show that: (i) The equilibrium tax rate is increasing in the proportion of tax reductions based on wage incomes. (ii) If labor and capital income taxes are reduced in the same proportion, to keep the government's budget balanced, majority voting yields a rate of environmental taxation that is lower than the optimal (Pigouvian) level. (iii) To mitigate this negative bias, the government reduces wage taxes by a higher proportion than capital income taxes. (iv) The final outcome will either be the Pigouvian tax or else all reductions will be given in wage taxes. This depends on individuals' preferences for the polluting good as well as wage and capital income distributions.

Original languageEnglish (US)
Pages (from-to)703-719
Number of pages17
JournalInternational Tax and Public Finance
Issue number6
StatePublished - Nov 2004


  • Pigouvian tax
  • environmental taxes
  • majority voting
  • political support

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics


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