Green Tax Reform and Competitiveness
AbstractThis 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.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2089.
Date of creation: Feb 1999
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Other versions of this item:
- Koskela, Erkki & Schöb, Ronnie & Sinn, Hans-Werner, 2000. "Green Tax Reform and Competitiveness," Discussion Papers 731, The Research Institute of the Finnish Economy.
- Erkki Koskela & Ronnie Schob & Hans-Werner Sinn, 1999. "Green Tax Reform and Competitiveness," NBER Working Papers 6922, National Bureau of Economic Research, Inc.
- H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
- J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects
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