Working Paper: NBER ID: w4896
Authors: Lawrence H. Goulder
Abstract: In recent years there has been great interest in the possibility of substituting environmentally motivated or 'green' taxes for ordinary income taxes. Some have suggested that such revenue-neutral reforms might offer a 'double dividend:' not only (1) improve the environment but also (2) reduce certain costs of the tax system. This paper articulates different notions of 'double dividend' and examines the theoretical and empirical evidence for each. It also draws connections between the double dividend issue and principles of optimal environmetal taxation in a second-best setting. A weak double dividend claim is that returning tax revenues through cuts in distortionary taxes leads to cost savings relative to the case where revenues are returned lump sum. This claim is easily defended on theoretical grounds and (thankfully) receives wide support from numerical simulations.The stronger versions contend that revenue-neutral swaps of environmental taxes for ordinary distortionary taxes involve zero or negative gross costs.Analyses numerical results tend to cast doubt on the strong double dividend claim.Yet the theoretical case against the strong form is not air-tight, and numerical dividend claim is dividend claim is rejected (upheld) are related to the conditions where the second-best optimal environmental tax is less than (greater than) the marginal environmental damages.The difficulty of establishing a strong double dividend claim heightens the importance of attending to and evaluating the (environmental) benefits from environmental taxes.
Keywords: Environmental Taxation; Double Dividend; Public Economics
JEL Codes: H23; Q58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Returning revenues from environmental taxes through cuts in distortionary taxes (H23) | Cost savings (D61) |
| Environmental taxes (H23) | Welfare outcomes (I38) |
| Revenue-neutral swaps of environmental taxes for distortionary taxes (H23) | Zero or negative gross costs (D62) |
| Optimal environmental tax < Marginal environmental damages (H23) | Strong double dividend claim holds (G35) |
| Tax interactions across markets (F38) | Efficiency costs of new environmental taxes (H23) |