EVALUATING TAX REFORMS IN THE PRESENCE OF EXTERNALITIES

According to the double-dividend hypothesis, revenue-neutralgreen tax reforms are expected both to improve the quality ofthe environment and to reduce the existing tax distortions.This paper develops welfare measures which are used to estimatethese dividends separately. It is shown that the existing taxsystem and the choice of the tax rate cuts which accompany anincrease in green taxes have considerable impact on the magnitudeof the environmental dividend. Even a negative impact cannotbe ruled out. Furthermore, the welfare measures allow us toanalyse the trade-off between the two dividends and to identifywelfare-improving tax reforms.