CONSEQUENCES OF ENVIRONMENTAL TAX-REFORM FOR UNEMPLOYMENT AND WELFARE

We investigate the welfare effects of environmental tax reform, i.e. r aising environmental taxes and using the proceeds to reduce distortion ary taxes on labour. The framework of analysis is a small open economy with involuntary unemployment due to a rigid consumer wage. Environme ntal tax reform boosts not only environmental quality but also employm ent if substitution between labour and resources is easy, the producti on share of the fixed factor is large, and the initial tax rates on re sources and profits are small. If the initial tax system is sub-optima l with a negligible tax on resources, profits rise as well.