This paper studies taxation on firms by examining profits tax and emission tax in a unified framework. We develop a model in which the government and the polluting firms bargain over the rates of profits tax and emission tax. We demonstrate that the bargaining position of firms is a key determinant of profits tax, but it does not affect emission tax. Emission tax may not be imposed, even if it has a twofold merit of increasing public revenue and regulating pollution. Moreover, public environmental expenditure will facilitate a cut in emission tax and therefore boost the production of firms. With the increased market demand for polluting goods, public environmental expenditure may be a better regulatory instrument than emission tax.