It has been argued recently that imposing taxes on pollution produces additional tax revenues which can then be used to replace labour taxes and thus reap a double dividend in the form of improving environmental quality and alleviating unemployment. This paper analyses the employment effects of revenue-neutral green tax reforms by focusing on the revenue recycling effect on employment. 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. If the polluting good is normal, a positive employment effect reduces the environmental dividend obtained from a revenue-neutral green tax reform. Contact Ronnie Schoeb Center for Economic Studies, University of Munich, Schackstr.