Alleviating unemployment: The case for green tax reforms

It has been argued recently that imposing taxes on pollution produces addit ional tax revenues which can be used to replace labour taxes and thus reap a double dividend in the form of improving environmental quality and allevi ating unemployment. This paper analyses the employment effects of revenue-n eutral green tax reforms by focusing on the revenue-recycling effect, Our m odel contains three features which are important when looking at the employ ment effects of green tax reforms, First, there is unemployment in equilibr ium, Second, wages are determined endogenously. Third, various institutiona l arrangements for taxing unemployment benefits, for the price-indexation o f unemployment benefits and the personal tax exemption are considered, It i s shown that these institutional arrangements are crucial for the effective ness of green tax reforms. A revenue-neutral green tax reform will boost em ployment if unemployment benefits are nominally fixed and taxed at a lower rate than labour income. Employment actually falls if unemployment benefits are price indexed and taxed at the same rate. A revenue-neutral green tax reform which increases the personal tax credit will never increase employme nt. (C) 1999 Elsevier Science B.V. All rights reserved. JEL classification: H20; H30; J51.