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Consumption Tax Policy and the Taxation of Capital Income$
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Raymond G. Batina and Toshihiro Ihori

Print publication date: 2000

Print ISBN-13: 9780198297901

Published to Oxford Scholarship Online: October 2011

DOI: 10.1093/acprof:oso/9780198297901.001.0001

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The Environment and Tax Policy

The Environment and Tax Policy

(p.194) 8 The Environment and Tax Policy
Consumption Tax Policy and the Taxation of Capital Income

Raymond G. Batina

Toshihiro Ihori

Oxford University Press

This chapter studies the relationship between taxation and two major issues in environmental economics: renewable resources and harmful stock externalities. In the overlapping generations (OG) model, it is possible for agents using competition to acquire large assets, such as resource stock. People will acquire assets, but this will drive down the returns of their investment below their optimal level. A general income tax, such as capital income tax, will lower the return of the acquiring asset and may improve welfare if it moves the competitive economy closer to the optimal expansion path. Consumption and production result in damage to the environment and actions by the government is needed. The government uses the tool of taxing capital in the long run if a production externality is present. Moreover, a consumption tax that is imposed on general consumption to clean up the environment allows the economy to support optimal allocation.

Keywords:   environmental economics, renewable resources, externalities, consumption, production, government policy, optimal allocation, environment

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