Working Paper: CEPR ID: DP2089
Authors: Erkki Koskela; Ronnie Schöb; Hans-Werner Sinn
Abstract: This paper develops a model of a small open economy that produces an export good with domestic labour and imported energy and is stuck in an unemployment situation resulting from an excessive fixed net-of-tax wage rate. We study a revenue-neutral green tax reform that substitutes energy for wage taxes. A moderate green tax reform will boost employment, improve welfare and increase the economy's competitiveness. The driving force behind these results is the technological substitution process that a green tax reform will bring about by inducing the producers to substitute labour for energy as factors of production. The resulting reduction in unemployment is welfare increasing since energy, which the country has to buy at its true national opportunity cost, is replaced with labour, whose price is above its social opportunity cost. As long as the labour tax rate exceeds the resource tax rate, a revenue-neutral green-tax reform will reduce the domestic firms' unit cost of production and hence increase international competitiveness and output of the economy.
Keywords: green tax reform; involuntary unemployment; competitiveness
JEL Codes: H20; J51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| green tax reform (H23) | employment (J68) |
| green tax reform (H23) | international competitiveness (F23) |
| employment (J68) | welfare (I38) |
| green tax reform (H23) | production costs (D24) |