Environmental Policy Commons^™

Environmental Policy In The Presence Of An Informal Sector, Antonio Bento, Mark Jacobsen, Antung Liu

Antonio M. Bento

We demonstrate how the presence of an untaxed informal sector can sharply lower the cost of environmental and energy tax policy. The mechanism involves substitution between formal and informal labor supply: energy or environmental taxes can improve the efficiency of the tax system by drawing activity into the formal sector. Our result applies to broad classes of corrective taxes and we first present it in a simple analytical framework. We then investigate its magnitude in a simulation model using the case of an energy tax in the U.S., where the informal sector is relatively small. Even so, we find the …