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Tax reform for dirty intermediate goods: theory and an application to the taxation of freight transport

Author

Listed:
  • Edward Calthrop

    (Jesus College, Oxford)

  • Bruno De Borger

    (Universiteit Antwerpen)

  • Stef Proost

    (K.U.Leuven, C.E.S., Energy, Transport and Environment)

Abstract

The purpose of this paper is to study, within a general equilibrium framework, the welfare implications of a balanced-budget tax reform for an externality-generating intermediate input in a second-best economic environment. For purposes of concreteness, the focus is on tax reform for freight road transport to cope with congestion externalities; results for other types of externalities can be derived as special cases. The model takes into account that passenger and freight flows jointly produce congestion, it captures feedback effects in demand, and it allows for existing distortions on all other input and output markets, including the passenger transport market and the labour market. Moreover, it clearly shows that the welfare effects of the reform depend on the instruments used to recycle the tax revenues. A numerical version of the model is calibrated to UK data. The numerical results suggest, among others, that (i) the welfare gain of a given freight tax reform rises with the level of the tax on the market for passenger transport; (ii) the higher the rate of passenger transport taxation, the lower the optimal freight tax; and (iii) compared to lump-sum recycling, both the welfare effects of a tax reform and the optimal tax are substantially higher when revenues are recycled via labour taxes.

Suggested Citation

  • Edward Calthrop & Bruno De Borger & Stef Proost, 2003. "Tax reform for dirty intermediate goods: theory and an application to the taxation of freight transport," Energy, Transport and Environment Working Papers Series ete0302, KU Leuven, Department of Economics - Research Group Energy, Transport and Environment.
    • Handle: RePEc:ete:etewps:ete0302
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    File URL: https://lirias.kuleuven.be/bitstream/123456789/119414/1/ETE-WP-2003-02.pdf
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    Citations

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    Cited by:

    1. Knud Munk, 2000. "Assessment of the Introduction of Road Pricing Using a Computable General Equilibrium Model," Regional and Urban Modeling 283600065, EcoMod.
    2. Parry, Ian W.H., 2008. "How should heavy-duty trucks be taxed?," Journal of Urban Economics, Elsevier, vol. 63(2), pages 651-668, March.
    3. Edward Calthrop, 2003. "On green production taxes," Economics Series Working Papers 158, University of Oxford, Department of Economics.
    4. De Borger, B. & Proost, S. & Van Dender, K., 2005. "Congestion and tax competition in a parallel network," European Economic Review, Elsevier, vol. 49(8), pages 2013-2040, November.
    5. Inge Mayeres & Stef Proost, 2004. "Towards better transport pricing and taxation in Belgium," Reflets et perspectives de la vie économique, De Boeck Université, vol. 0(4), pages 23-43.
    6. Ahlberg, Joakim, 2006. "Optimal Taxation of Intermediate Goods in the Presence of Externalities: A Survey Towards the Transport Sector," Working Papers 2006:3, Swedish National Road & Transport Research Institute (VTI).

    More about this item

    Keywords

    externalities; transport; taxes; freight; tax reform;
    All these keywords.

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • R41 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - Transportation: Demand, Supply, and Congestion; Travel Time; Safety and Accidents; Transportation Noise
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy

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