Discussion Paper 2011-01
J.E.L Classification: H21, H23


The literature on indirect tax reforms in pollution-ridden economies is quite limited. This paper, using a general model of a perfectly-competitive small open economy with both production and consumption generated pollution, considers the welfare implications of tax reforms that take the structure of consumption and production taxes toward uniformity. Specifically, both in the presence and absence of a binding government revenue constraint, we derive sufficient conditions for welfare improvement in the case where we implement (i) reforms in either production or consumption taxes, and (ii) reforms in both consumption and production taxes.