Optimal fiscal policy when tastes are inherited and environmental quality matters

Resumo

In this paper, we analyze optimal fiscal policies in an overlapping generation framework with two types of externalities: aspirations in preferences and environmental quality that deteriorates with the use of both a dirty consumption good and a polluting input. We focus on second-best policies when the government finances an exogenous flow of public spending by using taxes. We find that environmental concerns and aspirations are crucial when solving the planner’s problem. Particularly, we find that the planner must always tax both the polluting input and the dirty consumption good, and that it must tax differently the dirty and the clean consumption good with a higher tax on the first one. Aspirations induce overconsumption of the young generation and an appropriate fiscal policy should always increase savings and investment. It is also possible to avoid labor taxes provided that both consumptions goods are taxed at positive rates.