Optimal Taxation and Multiple Externalities in a Dynamic Economy

This paper characterizes the optimal mix of linear commodity and nonlinear income taxation in a dynamic economy with positional and environmental stock externalities from current and past consumption. Beyond showing that the principle of targeting fails when positional externalities are non-atmospheric, implying individualized marginal contributions, three findings emerge. First, the shadow prices of the externalities are dynamically interdependent, and the additivity property fails even without cross-substitution effects. Second, capital income taxation can be corrective, with its direction determined by relative positional damages across periods. Third, the framework clarifies how externality durability shapes the social marginal value of correction.