Assessing the Double Dividend Hypothesis in General Equilibrium Framework - Is there a Chance After All?

The paper presents small scale CGE models designed to analyze the double dividend problem i.e. the simultaneous improvement of efficiency and environment through a revenue neutral tax reform. We show that in a one factor model with leisure weakly separable from consumption, a double dividend in welfare sense may arise only if the Laffer curve is downward sloping. However, backward bending labor supply is sufficient for both employment and environment to improve. Introducing an additional primary input considerably widens the scope for a double dividend by allowing for the possibility of environmental tax to shift the tax burden on the relatively undertaxed factor. In an open economy the optimal division of tax burden depends on the relative mobility of the primary factors. We show that with pollution related to final consumption, a double dividend is likely to arise only if capital is relatively immobile. However, with pollution related to an imported production input, capital mobility increases the likehood of a double dividend.