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A note on the double dividend hypothesis

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  • Scholz, Christian M.

Abstract

This paper tries to clear the confusion in the literature about the potential of environmental tax reforms to yield a double dividend. In opposition to a number of recent papers it is found that the possibility for a double dividend depends largely on the substitutabllity characteristics of taxed commodities and not on the uncompensated elasticities. It is found that a double dividend is possible, if the following conditions are met. First, the initial tax system has to be inefficient from a non-environmental point of view. Second, it is possible to raise the tax on the externality creating commodity and in exchange to reduce the tax on a commodity that is a gross substitute for the externality creating commodity. Third, under the existing distortionary tax system the commodity whose tax is reduced is relatively difficult to substitute through other taxed commodities and hence, easier to substitute through the untaxed numeraire.

Suggested Citation

  • Scholz, Christian M., 1996. "A note on the double dividend hypothesis," Kiel Working Papers 764, Kiel Institute for the World Economy (IfW Kiel).
    • Handle: RePEc:zbw:ifwkwp:764
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    1. A. Lans Bovenberg & Frederick van der Ploeg, 2002. "Environmental Policy, Public Finance and the Labour Market in a Second-Best World," Chapters, in: Lawrence H. Goulder (ed.), Environmental Policy Making in Economies with Prior Tax Distortions, chapter 6, pages 112-153, Edward Elgar Publishing.
    2. J. R. Hicks, 1943. "The Four Consumer's Surpluses," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 11(1), pages 31-41.
    3. Lawrence Goulder, 1995. "Environmental taxation and the double dividend: A reader's guide," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 2(2), pages 157-183, August.
    4. Mayshar, Joram, 1990. "On measures of excess burden and their application," Journal of Public Economics, Elsevier, vol. 43(3), pages 263-289, December.
    5. A. B. Atkinson & N. H. Stern, 1974. "Pigou, Taxation and Public Goods," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 41(1), pages 119-128.
    6. de Bovenberg, A Lans & Mooij, Ruud A, 1994. "Environmental Levies and Distortionary Taxation," American Economic Review, American Economic Association, vol. 84(4), pages 1085-1089, September.
    7. Bovenberg, Ary Lans & de Mooij, Ruud A., 1995. "Environmental taxation and the double-dividend: The role of factor substitution and capital mobility," Discussion Papers, Series II 258, University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy".
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    Cited by:

    1. Heister, Johannes, 1997. "Ökologie und Marktwirtschaft: Eckpunkte einer zukunftsorientierten Umweltpolitik," Kiel Discussion Papers 291, Kiel Institute for the World Economy (IfW Kiel).

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