# 15-085/VIII (2015-07-23; 2017-10-26)

Author(s)
Ioannis Tikoudis, VU University Amsterdam, the Netherlands
Keywords:
labor tax, externality taxation, tax-interaction, double-dividend, network, general equilibrium
JEL codes:
H21, H23, R13, R40, C63. C68

This paper examines the properties of taxes applied in the road links of a polycentric network and their interaction with a spatially-invariant tax on labor income. With the use of a theoretical model, the total welfare change from a revenue-neutral swap between the tax in an arbitrary road link and the distortionary labor tax is decomposed into three distinct effects. These are shown to be the network counterparts of the tax-interaction, revenue-recycling and Pigouvian effects of traditional double-dividend theory. Subsequently, these effects are approximated in a numerical version of the model, used to simulate various tax schemes imposed during the peak commuting hours. With the elasticities of labor supply and transport at plausible values, the results suggest that a cut in the distortionary tax, financed by the road tax revenue, is an essential policy element, independent of the applied tax scheme. In the context of a revenue-neutral tax swap, marginal external cost pricing and the flat kilometer tax are shown to be particularly efficient at low rates of the distortionary tax. At high rates, however, a system of cordon tolls around the major employment nodes of the network is shown to be more effective. With the transportation cross-elasticities at the lower bound, the results show that marginal external cost pricing may be welfare-reducing even when its revenue is recycled in a tax cut manner. At the same time, other archetype externality pricing schemes produce gains only in very low levels of the distortionary tax.