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Tax deductions, environmental policy, and the"double dividend"hypothesis

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  • Parry, Ian
  • Bento, Antonio

Abstract

The authors find that incorporating tax-favored consumption in models of environmental tax swaps may overturn key results from earlier studies. In particular, a revenue-neutral pollution tax (or auctioned permits) can produce a substantial"double dividend"by reducing both pollution and the costs of the tax system. The second dividend arises because the welfare gain from using environmental tax revenues to cut labor taxes is much larger when labor taxes also distort the choice among consumption goods. Indeed, (ignoring environmental benefits), the overall costs of a revenue-neutral pollution tax are negative in the benchmark simulations, at leastfor pollution reductions up to 17 percent, and possibly up to 42 percent. In addition, the authors show that the presence of tax-favored consumption may drastically increase the efficiency gain from using (revenue-neutral) emissions taxes (or auctioned emissions permits) rather than grand-fathered emissions permits.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2119.

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Date of creation: 31 May 1999
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Handle: RePEc:wbk:wbrwps:2119

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Related research

Keywords: Labor Policies; Economic Theory&Research; Public Sector Economics&Finance; Environmental Economics&Policies; Banks&Banking Reform; Public Sector Economics&Finance; Banks&Banking Reform; Health Economics&Finance; Environmental Economics&Policies; Economic Theory&Research;

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  1. Snow, Arthur & Warren, Ronald Jr., 1996. "The marginal welfare cost of public funds: Theory and estimates," Journal of Public Economics, Elsevier, vol. 61(2), pages 289-305, August.
  2. Pauly, Mark V, 1986. "Taxation, Health Insurance, and Market Failure in the Medical Economy," Journal of Economic Literature, American Economic Association, vol. 24(2), pages 629-75, June.
  3. Feldstein, Martin, 1997. "How Big Should Government Be?," National Tax Journal, National Tax Association, vol. 50(2), pages 197-213, June.
  4. Martin Feldstein, 1995. "Tax Avoidance and the Deadweight Loss of the Income Tax," NBER Working Papers 5055, National Bureau of Economic Research, Inc.
  5. Harvey S. Rosen, 1983. "Housing Subsidies: Effects on Housing Decisions, Efficiency, and Equity," NBER Working Papers 1161, National Bureau of Economic Research, Inc.
  6. Burtraw, Dallas & Krupnick, Alan & Austin, David & Farrell, Deirdre & Mansur, Erin, 1997. "The Costs and Benefits of Reducing Acid Rain," Discussion Papers dp-97-31-rev, Resources For the Future.
  7. A. Bovenberg & Frederick Van der Ploeg, 1998. "Consequences of Environmental Tax Reform for Unemployment and Welfare," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 12(2), pages 137-150, September.
  8. Martin Feldstein, 1996. "How Big Should Government Be?," NBER Working Papers 5868, National Bureau of Economic Research, Inc.
  9. Feldstein, Martin, 1997. "How Big Should Government Be?," Scholarly Articles 3043427, Harvard University Department of Economics.
  10. Brett, Craig & Keen, Michael, 2000. "Political uncertainty and the earmarking of environmental taxes," Journal of Public Economics, Elsevier, vol. 75(3), pages 315-340, March.
  11. Lawrence H. Goulder & Ian W. H. Parry & Dallas Burtraw, 1996. "Revenue-Raising vs. Other Approaches to Environmental Protection: The Critical Significance of Pre-Existing Tax Distortions," NBER Working Papers 5641, National Bureau of Economic Research, Inc.
  12. Victor R. Fuchs & Alan B. Krueger & James M. Poterba, 1998. "Economists' Views about Parameters, Values, and Policies: Survey Results in Labor and Public Economics," Journal of Economic Literature, American Economic Association, vol. 36(3), pages 1387-1425, September.
  13. Pizer, William, 1997. "Prices vs. Quantities Revisited: The Case of Climate Change," Discussion Papers dp-98-02, Resources For the Future.
  14. Oates, Wallace E. & Strassmann, Diana L., 1984. "Effluent fees and market structure," Journal of Public Economics, Elsevier, vol. 24(1), pages 29-46, June.
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  1. > Environmental and Natural Resource Economics > Climate economics > Abatement costs
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