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Taxation, Unemployment and Growth: Dynamic Welfare Effects of "Green" Policies




This paper analyses the effects of so-called "green" tax reforms on a small, open economy producing an imperfect substitute for foreign goods, using an intertemporal general equilibrium model. The labour market is characterised by union wage setting, and a fixed exchange rate implies wage rigidity and involuntary unemployment. The long run effects on instantaneous utility, employment and the stock of real and financial capital of a revenue neutral increase in the tax on fossil fuels combined with a) lump sum rebating or b) change in the labour income tax rate, are discussed. Due to the changes in instantaneous utility during the time path following the implementation of the tax reform, the total welfare effect may be positive even with a reduction in long run consumption. The total welfare effect is in general more positive (or less negative) with wage tax reduction than lump-sum rebating.

Suggested Citation

  • Brita Bye, 1996. "Taxation, Unemployment and Growth: Dynamic Welfare Effects of "Green" Policies," Discussion Papers 183, Statistics Norway, Research Department.
  • Handle: RePEc:ssb:dispap:183

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    Cited by:

    1. Bye, Brita, 2002. "Taxation, Unemployment, and Growth: Dynamic Welfare Effects of "Green" Policies," Journal of Environmental Economics and Management, Elsevier, vol. 43(1), pages 1-19, January.

    More about this item


    Dynamic equilibrium analysis; Unemployment; Environmental tax reforms.;

    JEL classification:

    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • D60 - Microeconomics - - Welfare Economics - - - General
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy


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