Money Illusion and the Double Dividend in the Short Run

Abstract. In their seminal paper, Bovenberg and de Mooij (1994) elucidate why an ecological tax reform will not yield a double dividend, i.e. fails to increase the efficiency of the tax system. The present paper slightly modifies the Bovenberg and de Mooij model by introducing money illusion. With this modification, an environmental tax reform that raises the price level may generate a double dividend, since the additional tax on the dirty good does not reduce labor supply. A prerequisite for the double dividend to occur is a sufficiently small elasticity of substitution between clean and dirty consumption. Moreover, accounting for money illusion always reduces the intertemporal gross cost of the tax reform.     

Green tax reforms and habits

Using a dynamic general equilibrium model, we explore the role of habit formation when analyzing green tax reforms under the double dividend hypothesis. We assume increases in energy taxes and adjust capital taxation in a revenue-neutral framework to evaluate the effects on welfare. Since the existence of an environmental dividend is uncontroversial, we mainly focus on the efficiency dividend. Our findings show that, when taxes on household energy consumption increase, habits and transitional dynamics alter household decisions, and change the efficiency dividend. However, when the tax increase is on energy used as an input, reform always induces a welfare cost in terms of efficiency. In this case, habits play a less important role.     

Double dividend,dynamic Laffer effects and public abatement

In a very stylized endogenous growth economy with pollution and public abatement activities and without any production externality, we show that the government may exploit dynamic Laffer effects to achieve a double dividend through an environmental tax reform, while fulfilling its commitment to provide an exogenously specified sequence of expenditures in the form of lump-sum transfers to consumers.     

Should high-tax countries pursue revenue-neutral ecological tax reforms?

A politically intriguing question concerning the effects of a revenue-neutral ecological tax reform is whether such a political measure may succeed in providing a double dividend: to improve environmental quality and increase employment simultaneously. Theoretical studies reveal that for a competitive labor-market a green tax reform hardly yields a positive employment effect, whereas for a non-competitive market such an effect may well be obtained. However, little attention has focused on whether the ecological dividend remains attainable when an employment dividend accrues. We show for three different non-competitive labor-market scenarios that a positive employment effect can be expected, but that, for high-tax countries, environmental quality plausibly deteriorates when a revenue-neutral ecological tax reform is implemented.     

On the Double Dividend under Imperfect Competition

We investigate whether, and under which conditions, a revenue-neutral environmental tax reform may yield an employment double dividend, i.e., an improvement of environmental quality and an increase in aggregate employment. Using a model with two market imperfections – a rigid real wage and imperfect competition in one industry – we show that an employment dividend is plausibly obtained. However, for countries where labor taxes are high and households spend a large share of their income in favor of environmentally harmful consumption goods a double dividend can nevertheless not be obtained, for under these conditions environmental quality deteriorates.     

Environmental Policy, Tax Incidence, and the Cost of Public Funds

This paper studies under what conditions a double dividend may occur in the sense that both environmental quality and employment rise. A simple static general equilibrium model is employed in which tax policy faces the dual task of internalising a negative environmental externality and raising revenue to finance public consumption. The model features a clearing labour market with both labour demand and supply and a fixed factor of production (e.g. capital). Hence, we can study tax incidence and its effect on employment, environmental quality, and the marginal cost of public funds. It is shown for the case of an upward sloping labour supply curve and less than full tax shifting by employers that a shift towards greener preferences cannot yield a double dividend, even if the fixed factor is important. However, if labour supply curve bends backwards, more environmental concern confers a double dividend.     

中国的绿色政策与就业:存在双重红利吗?

减排与就业的"双重红利假说"认为:在征收碳税的同时减少所得税,能够实现减少碳排放与增加就业的双重红利。现实中,很多欧洲国家通过改变税收扭曲,成功地获得了"双重红利效应"。同样,中国也面临着开征碳税以及减少个人所得税的现实问题。那么,通过税收结构调整,中国能否创造出类似于欧洲国家的就业"双重红利"是一个非常值得探讨的问题。本文在VAR模型的基础上,模拟了中国的就业双重红利问题。最终发现:征收10元/吨的碳税对两部门的产出和就业影响并不显著;如果采取征收碳税并减少所得税的"中性"绿色税收政策将会促进中国低碳部门的产出增长;但至少到目前为止,与发达国家的经验事实不同,中国还难以在短期内获得就业的"双重红利"。然而,在节能减排和经济结构调整的双重压力下,改革税收体系以促进中国低碳经济的发展也不失为一种次优的选择。     

Reflections on the Double Dividend Debate

We survey the history of carbon taxation, the range of market-based instruments (MBIs) of environmental control, and the state of the double dividend debate, in order to suggest directions for future research into MBIs. Returning MBI revenues as lower distortionary taxes rather than as lump sums raises aggregate welfare, but we favour MBIs which raise little or no revenue, for reasons of political acceptability to interest groups. At the same time, the overall case for any environmental improvement is weaker because of general equilibrium interactions with prior distortionary taxes. Research seems most necessary on quantifying the efficiency benefits of market control of heterogeneous polluters, the benefits of environmental improvement, the tax interaction effect, and the various information costs of an MBI, all on a case-by-case basis for different pollutants and places.     

Optimal combination of innovation and environmental policies under technology licensing

Under what conditions will a carbon tax encourage environmental innovation? Can a regulator design an optimal environmental policy to reduce emissions and to promote clean technologies? This paper studies optimal environmental policy in the situation where a monopoly innovator develops and licenses clean production technologies to downstream polluting firms. We find that (i) a higher emission tax will encourage innovation when the burden of the tax payment in the polluters' costs and/or the price-elasticity of the demand for polluting goods are small, (ii) the innovation-inducing effects of emission tax are inversely related to the emission-reduction (Pigouvian) effects of the tax, and (iii) the social optimum can be achieved by the mix of tax and subsidy. We also show that if the policy instrument is limited to the tax, the second-best tax rate would lie between the marginal damage and the first-best rate. By performing numerical simulations, we also demonstrate that the optimal mix of the emission tax and R&D subsidy can have “double dividend” benefits.     

Support to renewable energy sources and carbon capture and sequestration: comparison of alternative green tax reforms

We compare the economic and environmental effects of several specifications of a green tax reform (GTR) where tax revenues are used to support renewable energy sources (RESs) and carbon capture and sequestration (CCS) activities. With this aim, we propose an equilibrium model where final-goods production uses labour and energy, and energy production uses nonpolluting RES and polluting fossil fuels. The comparison is based on three key indicators: output per worker, energy intensity and the ratio of renewables over nonrenewables. We test five variations of the GTR in addition to the no-policy case. Results show that a GTR as the one we propose here never provides a double dividend. There are environmental benefits but at the expense of the economy. Additionally, for lower tax levels, prioritizing RES support has lower economic costs and potential environmental benefits. For higher tax levels, CCS support becomes more competitive.     

Growth,intergenerational welfare,and environmental policies in an overlapping generations economy

This paper examines the effects of the environmental tax on long‐run growth and intergenerational welfare in a discrete‐time overlapping generations (OLG ) model. We highlight that the role regarding how the environmental tax revenues are distributed between the young or old generations has important implications for the growth and welfare effects. Our results indicate that raising the environmental tax can exert different effects on the environmental utility of the existing young and old generations, implying an intergenerational welfare conflict of the environmental policy. However, if tax revenues are distributed appropriately, our numerical simulation shows that it is possible for a higher environmental tax to improve the welfare of all generations.     

THE FISCAL DIVIDEND MYTH OF AN INCOME/GST TAX SWITCH*

Reaping a windfall fiscal dividend from the taxation of the ‘underground’ economy's expenditures on ‘legitimate’ commodities is often seen as a significant advantage for a goods and services tax (GST) over an income tax. This claim ignores the changes in prices in the underground economy which would arise from the introduction of a GST. Employing a general equilibrium model which allows for tax evasion, we show that any ‘dividend’ arising from a change in the income tax/GST mix is equivalent to a rise in the income tax rate without a GST.     

THE POLITICAL ECONOMY OF ENVIRONMENTAL POLICY WITH OVERLAPPING GENERATIONS

A two‐sector overlapping generations model illuminates the intergenerational effects of a tax that protects an environmental stock. A traded asset capitalizes the economic returns to future tax‐induced environmental improvements, benefiting the current asset owners, the old generation. Absent a transfer, the tax harms the young generation by decreasing their real wage. Future generations benefit from the tax‐induced improvement in environmental stock. The principal intergenerational conflict arising from the tax is between generations alive at the time society imposes the policy, not between generations alive at different times. A Pareto‐improving tax can be implemented under various political economy settings.     

The double dividend, second-best worlds, and real-world environmental policy

The recent series of papers by Bovemberg, Goulder, Parry and others argue that the double dividend is unlikely to exist because of second-best problems. They argue that the imposition of environmental tax in an economy already distorted by income taxes will further distort the economy by reducing incentives to supply labor. Our paper argues that this is not likely to be the case because of the restrictive assumptions made by these models, and because of the role of the environment as a factor of production.     

Carbon Taxes and Joint Implementation. An Applied General Equilibrium Analysis for Germany and India

Germany has committed itself toreducing its carbon emissions by 25 percent in2005 as compared to 1990 emission levels. Toachieve this goal, the government has recentlylaunched an environmental tax reform whichentails a continuous increase in energy taxesin conjunction with a revenue-neutral cut innon-wage labor costs. This policy is supposedto yield a double dividend, reducing both, theproblem of global warming and high unemploymentrates. In addition to domestic actions,international treaties on climate protectionallow for the supplementary use of flexibleinstruments to exploit cheaper emissionreduction possibilities elsewhere. One concreteoption for Germany would be to enter jointimplementation (JI) with developing countriessuch as India where Germany pays emissionreduction abroad rather than meeting itsreduction target solely by domestic action. Inthis paper, we investigate whether anenvironmental tax reform cum JI providesemployment and overall efficiency gains ascompared to an environmental tax reformstand-alone. We address this question in theframework of a large-scale general equilibriummodel for Germany and India where Germany mayundertake JI with the Indian electricitysector. Our main finding is that JI offsetslargely the adverse effects of carbon emissionconstraints on the German economy. JIsignificantly lowers the level of carbon taxesand thus reduces the total costs of abatementas well as negative effects on labor demand. Inaddition, JI triggers direct investment demandfor energy efficient power plants produced inGermany. This provides positive employmenteffects and additional income for Germany. ForIndia, joint implementation equips itselectricity industry with scarce capital goodsleading to a more efficient power productionwith lower electricity prices for the economyand substantial welfare gains.     

股息红利双重征税的税收处理问题

围绕股息红利双重征税的税收处理问题,本文首先分析了股息红利双重征税税收处理的理论模式,并对各种模式的优缺点进行了比较。随后,以OECD成员国为样本系统考察了各国所采取的股息红利双重征税税收处理办法,分析了它们的演变过程、目前状态和未来的发展趋势。在此基础上,考察了中国现行股息红利双重征税的税收处理办法,并从理论与实践的结合上,分析了它的利弊得失,明确了它的发展方向。     

生态赤字税：理论与实证研究框架

文章基于生态足迹核算方法和生态服务价值理论所确定的价格体系,在核算生态赤字及其价值并提出其价值补偿的环境税方案的基础上,将生态占用作为一种要素投入,构建绿色社会核算矩阵和环境税 CGE 模型,通过数值模拟比较分析了在5%、10%和30%的补偿强度下税收方案的环境效应、就业效应、增长效应、分配效应和贸易效应。模拟结果表明：(1)生态赤字税方案具有减少生态占用和增加就业的双重红利效应;(2)各部门的总产出和中间投入总体上下降,但名义 GDP 增长,绿色 GDP 增幅更大,而实际 GDP 则下降,表明税收政策会造成价格指数一定程度的上升;(3)政府税收收入因生态赤字补偿额度较大而增长较快,且增速高于劳动和资本要素报酬的增长,但居民收入和企业收入比重略有下降。基于我国资源与环境等税收在总税收中的比重,以及 OECD 国家的税制结构和变化趋势,文章最后建议生态赤字税的补偿性税率应低于5%。     

A classroom game on a negative externality correcting tax: Revenue return,regressivity, and the double dividend

The concept of negative externality is central to the teaching of environmental economics, but corrective taxes are almost always regressive. How exactly might governments return externality-correcting tax revenue to overcome regressivity and not alter marginal incentives? In addition, there is a desire to achieve a double dividend in the use of externality-correcting taxes, that is, to use the revenue to offset existing distortionary taxes, such as those on labor that produce a dead weight loss. In this article, the authors explain a classroom game that was developed for students to understand the theory of externalities, taxation dead weight loss, and regressivity. Then, the problem helps students explore the actual design of a policy that satisfies the double dividend hypothesis and corrects for regressivity.     

Efficient Environmental Taxation Under Worker-Firm Bargaining

We study an economy with free firm entry and unemployment due to firm-worker bargaining over each firm's surplus, and where firms cause pollution that can be reduced by initial investments. An uncompensated increase in the pollution tax reduces pollution but increases unemployment, implying a tradeoff between the two. When tax revenues are used to subsidize either firms' hiring or investments, employment may also increase, creating a double dividend from the pollution tax. A pollution tax increase used to subsidize current employment is always less effective than a hiring subsidy, and is totally ineffective when subsidies equal pollution tax revenues for each individual firm. We show that the (hypothetical) pollution tax implementing the first-best solution exceeds the Pigouvian tax. The second-best tax exceeds this first-best tax when we have a double dividend, and is below it when we do not.     

基于可计算的一般均衡模型的我国碳税政策“双重红利”研究

建立了分析我国减少二氧化碳排放而征收碳税的可计算的一般均衡模型,分析碳税政策的双重红利。结果显示:为减少二氧化碳排放而征收碳税,对社会经济变量将造成一定的负面影响。保持财政中性,在征收碳税的时候,减少居民或者企业间接税,都可以在减少二氧化碳排放量的同时提高社会福利或者保持社会福利变化不大,实现碳税的双重红利。但是在保持财政中性,在征收碳税的同时减少企业所得税,虽然减少了二氧化碳排放量,居民的社会福利却有了更大程度的下降。