Optimal fiscal policy with environmental tax and pollution abatement spending in a model with utility-enhancing environmental quality: lessons from Bulgaria

摘要

This paper characterized optimal fiscal policy in the presence of pollution, and evaluated it relative to the observed one in Bulgaria. To this end, a dynamic general-equilibrium model is calibrated to Bulgarian data. The main findings are: (ⅰ) The optimal steady-state income tax rate is zero; (ⅱ) the benevolent Ramsey planner provides 20% higher utility-enhancing environmental quality; (ⅲ) the optimal level of carbon taxes is almost three times higher, and the optimal level of abatement spending is six times higher; (ⅳ) the optimal steady-state consumption tax is twice lower.