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  5. The Environmental Bias of Corporate Income Taxation

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

The Environmental Bias of Corporate Income Taxation

  • Luigi Iovino
  • Thorsten Martin
  • Julien Sauvagnat
American Economic Review (Forthcoming)

Abstract

We study the relationship between corporate income taxation and carbon dioxide (CO2) emissions in the U.S. We show that CO2-intensive firms benefit more from the tax advantage of debt, and pay lower income taxes on their capital income. Building on these new facts, we provide evidence that a cut in the corporate income tax rate leads to a larger expansion of clean firms. We develop a multi-sector general equilibrium model that accounts for our evidence and quantify the impact of corporate tax reforms on aggregate emissions. A policy that eliminates the tax advantage of debt could reduce aggregate emissions without affecting GDP.

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