Yunmin Chen

Academia Sinica, Taiwan

Brian Chi-ang Lin

Department of Public Finance National Chengchi University, Taiwan

John E. Anderson

Department of Economics University of Nebraska-Lincoln, USA

1. Introduction

Environmental issues have drawn more and more attention and the analysis of market-based policy instruments such as taxes and charges for reducing environmental externalities has been well documented in the literature. Although a wide range of environmental externalities such as various types of pollution have been examined, the practical experiences have shown that the role of environmental taxes and charges is very limited. Clearly, higher tax rates create a political obstacle to the promotion of the environmental tax base and system. To help resolve the critical issues of environmental deterioration, this paper proposes that the government can initiate a spending scheme for the green public good provision.

To demonstrate that government green spending can be an affective measure for not only lowering tax rates but also improving environmental quality, we extend the model examined in the literature of optimal taxation by incorporating the condition of environmental sustainability. To the best of our knowledge, we are the first to discuss the problem of environmental sustainability in the optimal taxation literature. Our approach can also be seen as part of a literature that integrates environmental sustainable ...

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