Alleviating Unemployment: The Case for Green Tax Reforms

CES Working Paper at Univ. of Munich 106

Posted: 10 Sep 1996

See all articles by Ronnie Schöb

Ronnie Schöb

CESifo (Center for Economic Studies and Ifo Institute); Freie Universitaet Berlin

Erkki Koskela

University of Helsinki - Department of Political and Economic Studies; CESifo (Center for Economic Studies and Ifo Institute); Bank of Finland - Research Department; IZA Institute of Labor Economics

Date Written: May 1996

Abstract

It has been argued recently that imposing taxes on pollution produces additional tax revenues, which can then be used to replace labor taxes and thus reap a double dividend in the form of improving environmental quality and alleviating unemployment. This paper analyzes the employment effects of revenue-neutral green tax reforms by focusing on the revenue recycling effect on employment. Our model contains three features which are important when looking at the employment effects of green tax reforms: 1) there is unemployment in equilibrium; 2) wages are determined endogenously; and 3) various institutional arrangements for taxing unemployment benefits, for the price-indexation of unemployment benefits and for personal tax allowances are considered. The employment effects of a revenue-neutral green tax reform are sensitive to institutional arrangements concerning taxation and indexation of unemployment benefits and personal tax allowances. A revenue-neutral green tax reform will boost employment if unemployment benefits are untaxed and nominally fixed. Employment actually falls if unemployment benefits are taxed and price indexed. When employment changes, the functional distribution of income also changes. Total private income, after-tax profits and after-tax labor income increase with employment, while transfer income decreases. If the polluting good is normal, a positive employment effect reduces the environmental dividend obtained from a revenue-neutral green tax reform.

JEL Classification: H21, H22, H23, H25, J22, J3

Suggested Citation

Schöb, Ronnie and Schöb, Ronnie and Koskela, Erkki, Alleviating Unemployment: The Case for Green Tax Reforms (May 1996). CES Working Paper at Univ. of Munich 106, Available at SSRN: https://ssrn.com/abstract=3355

Ronnie Schöb (Contact Author)

Freie Universitaet Berlin ( email )

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University of Helsinki - Department of Political and Economic Studies ( email )

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