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Money Illusion and the Double Dividend in the Short Run

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Reto Schleiniger
Abstract

In their seminal paper, Bovenberg and De Mooij (1994) elucidate why an ecological tax reform will not yield a double dividend, i.e. fails to increase the efficiency of the tax system. The present paper slightly modifies the Bovenberg and De Mooij model by introducing money illusion. With this modification, an environmental tax reform that raises the price level may generate a double dividend, since the additional tax on the dirty good does not reduce labor supply. A prerequisite for the double dividend to occur is a sufficiently small elasticity of substitution between clean and dirty consumption. Moreover, accounting for money illusion always reduces the intertemporal gross cost of the tax reform.

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Paper provided by Institute for Empirical Research in Economics - IEW in its series IEW - Working Papers with number iewwp093.

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Handle: RePEc:zur:iewwpx:093

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Related research
Keywords: Environmental tax reform; money illusion; double dividend;

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Find related papers by JEL classification:
E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy

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