Optimality of relaxing revenue-neutral restrictions in green tax reforms
Green Tax Reforms [GTR] have been initially devised as a policy proposal to tackle simultaneously several political goals, such as accomplishing environmental objectives together with lesser tax distortions requiring tax revenue recycling. Yet, recent fiscal stress episodes in many developed countries have defied this view. In this paper, we assess the convenience of revenue-neutral restrictions in GTR on efficiency basis. Usual revenue-neutral conditions impose on policymakers additional constraints that may restrain welfare gains. Our conclusions may provide theoretical support for the third generation of GTR (calling for a departure from revenue-neutral conditions on GTR), as well as some recent legal European experiences.
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