lecture11 - Lecture Note 11: Green Tax Reforms and the...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Lecture Note 11: Green Tax Reforms and the Double Dividend Debate Part 2B: Paper 1. Dr. T.S. Aidt University of Cambridge 1. Introduction Environmental taxes raise revenue which can be used to reduce distortionary taxes, such as the income tax, elsewhere in the economy. Since environmental taxes are corrective and income taxes are distor- tionary, this line of reasoning has produced the idea that a revenue- neutral green tax reform where green taxes replace distortionary taxes may reduce the overall e¢ ciency cost of generating a given amount of revenue net of any environmental bene±t. That is, there may be a double dividend associated with a revenue-neutral green tax reform: the reform discourages environmentally harmful activities (ex- ternalities) and thereby produces an environmental bene±t. the reform reduces the distortionary cost of the tax system by lowering the marginal tax on earned income (or capital). The hypothesis of the double dividend is attractive from a politi- cal point of view. This is because when it is di¢ cult to quantify the environmental bene±t of a given policy proposal (think about CO 2 justify the reform even when the environmental bene±t is highly un- certain. The purpose of this lecture is to discuss these ideas. Before we embark on this, it should, however, be pointed out that the dis- cussion of the double dividend is about green taxes and their role in reducing the e¢ ciency cost of raising public revenues. Recall that a Disclaimer: This note may contain mistakes. If you spot any, please bring them to my attention.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Lecture Note 11: 2 green tax is a tax on inputs (such as coal or oil) or outputs (such as electricity) and not a tax directly imposed on the (environmental) externality. We know from our previous discussion of green taxes [see lecture note 9-10] that they are only second best and so their intro- duction generates deadweight costs that should be traded o/ against when there are other distortionary taxes in place that can be reduced using the revenues generated by the green tax. 2. The weak and the strong double dividend claim Suppose the government wants to raise a given amount of revenue, R . The question we are concerned with is whether or not using the revenue generated by an environmental tax to reduce distortionary taxes elsewhere in the economy can reduce the overall e¢ ciency cost of raising R . It is convenient to start by clarifying what we mean by e¢ ciency cost in this context.
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 06/04/2011 for the course ECONOMICS paper 1 taught by Professor Aidt during the Spring '11 term at Cambridge.

Page1 / 21

lecture11 - Lecture Note 11: Green Tax Reforms and the...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online