The impact of environmental tax revenue allocation on the consequence of lobbying activities

Abstract

This paper investigates how a tax revenue allocation rule determines the level of environmental taxation influenced by interest groups. A model of special interest politics is modified to incorporate environmental taxation. Two groups of agents exist. The first group earns wage income, has negative utility derived from pollution generated by energy consumption, and earns a profit share of the energy industry. The second group earns wages and has negative utility from pollution, but does not own shares. The government imposes an ad-valorem pollution tax and spends a proportion of its revenue as compensation for the tax burden on the first group and the remainder on public abatement. Two regimes are considered. First, a resource-rent group lobbies the government to protect its income source. Second, an environmentally conscious group lobbies the government to spend the revenue for pollution reduction. The critical proportion of transfer to tax revenue is derived to achieve the socially optimal rate of environmental taxation, even when the tax rate is subject to the influence of interest groups.

Appendices

Appendix A: Comparison between Optimal And Equilibrium Tax Rates

Consider regime (1) wherein the resource-rent group contributes. Let the difference between the optimal and the equilibrium tax rates be

$$\begin{aligned} \Theta _{R}\equiv \tau ^{o}-\tau _{R}^{*}=(1-\lambda _{R})\Omega , \end{aligned}$$

where

$$\begin{aligned} \Omega= & {} \alpha v_{p}\left[ \phi +(1-\alpha )(1-\eta )(1-2\phi )\right] +(1-\alpha )\left[ (1-\alpha )(1-\eta )-\phi \right] , \end{aligned}$$

and $0<\lambda _{R}=r+\beta n<1$. To ensure that the equilibrium tax rate $\tau _{R}^{*}$ is equal to the optimum $\tau ^{o}$ (consequently, $\Theta _{R}=0$), let the critical proportion of transfer to tax revenue be

$$\begin{aligned} {\bar{\phi }}=\frac{(1-\alpha )(1-\eta )\left[ \alpha v_{p}+(1-\alpha )\right] }{(1-\alpha ) -\alpha v_{p}\left[ 1-2(1-\alpha )(1-\eta )\right] }. \end{aligned}$$

$\Omega \gtreqless 0$ if $\phi \lesseqgtr {\bar{\phi }}$. Since $\beta <1$, we have $\tau ^{o}>\tau _{R}^{*}$ if $\phi <{\bar{\phi }}$ or $\tau ^{o}<\tau _{R}^{*}$ if $\phi >{\bar{\phi }}$. Next, consider regime (2) wherein the environmentally conscious group contributes. Let the difference between the equilibrium and the optimal tax rates be

$$\begin{aligned} \Theta _{N}\equiv \tau _{N}^{*}-\tau ^{o}=(\lambda _{N}-\beta )\Omega , \end{aligned}$$

where $\lambda _{N}=\beta r+n=\beta -n(\beta -1)>\beta$. Similarly, we have $\tau _{N}^{*}>\tau ^{o}$ if $\phi <{\bar{\phi }}$ or $\tau _{N}^{*}<\tau ^{o}$ if $\phi >{\bar{\phi }}$. Finally, in result (3), $\Omega =0$ if $\phi ={\bar{\phi }}$: then, we find $\Theta _{R}=\Theta _{N}=0$ and $\tau ^{o}=\tau _{R}^{*}=\tau _{N}^{*}$.

Appendix B: Effects of changes in the proportion of transfer to tax revenue on convergence

As for result (1), consider the regime with lobbying by the resource-rent group. We differentiate the difference between the optimal and equilibrium tax rates (18) with respect to the proportion of transfer to revenue parameter $\phi$ as follows:

$$\begin{aligned} \frac{\partial \Theta _{R}}{\partial \phi }=-(1-\lambda _{R})\left\{ (1-\alpha )-\alpha v_{p}\left[ 1-2(1-\alpha )(1-\eta )\right] \right\} <0, \end{aligned}$$

if the curly brackets are positive or $H=\frac{1}{1-\eta }<2(1-\alpha )\frac{\alpha v_{p}}{\alpha (v_{p}+1)-1}$ as long as $v_{p}>\frac{1-\alpha }{\alpha }$. The above inequality indicates that an increase in $\phi$ makes the divergence between the optimum and the equilibrium smaller when the energy resource sector is fairly concentrated and the marginal damage of pollution is sufficiently high. Similarly, for result (2) under the regime with lobbying by the environmentally conscious group, if we differentiate (19) with respect to $\phi$, we have

$$\begin{aligned} \frac{\partial \Theta _{N}}{\partial \phi }=-(\lambda _{N}-\beta )\left\{ (1-\alpha )-\alpha v_{p}\left[ 1-2(1-\alpha )(1-\eta )\right] \right\} <0, \end{aligned}$$

and find the same result as in result (1).