Environmental Tax and the Distribution of Income among Heterogeneous Workers

This paper analyzes the environmental tax policy issues when labor is heterogeneous. The objec- tive is to assess whether an environmental tax policy could be Pareto improving, when the revenue of the pollution tax is recycled by a change in the labor tax properties. We show that, depending on the heterogeneity characteristics of labor and on the initial structure of the tax system, a policy mix could be designed in order to leave each class of worker unharmed. It consists of an increase in progressivity together with a decrease in the ‡at rate component of the wage tax.