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Environmental Taxes and the Double-Dividend Hypothesis: Did You Really Expect Something for Nothing?


Don Fullerton


University of Illinois at Urbana-Champaign - Department of Finance; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute)

Gilbert E. Metcalf


Tufts University - Department of Economics; National Bureau of Economic Research (NBER)

September 1997

NBER Working Paper No. w6199

Abstract:     
The double-dividend hypothesis' suggests that increased taxes on polluting activities can provide two kinds of benefits. The first is an improvement in the environment, and the second is an improvement in economic efficiency from the use of environmental tax revenues to reduce other taxes such as income taxes that distort labor supply and saving decisions. In this paper, we make four main points. First, the validity of the double-dividend hypothesis cannot logically be settled as a general matter. Second, the focus on revenue in this literature is misplaced. We demonstrate that three policies have equivalent impacts on the environment and on labor supply. One of those policies raises revenue from the environmental component of the reform, another loses revenue, and a third has no revenue associated with it. Third, what matters is the creation of privately-held scarcity rents. Policies that raise product prices through some restriction on behavior may create scarcity rents. Unless those rents are captured by the government, such policies are less efficient at ameliorating an environmental problem than are policies that do not create rents. Finally, we distinguish between two types of command and control regulations on the basis of whether they create scarcity rents.

Number of Pages in PDF File: 42

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Date posted: August 18, 2000  

Suggested Citation

Fullerton, Don and Metcalf, Gilbert E., Environmental Taxes and the Double-Dividend Hypothesis: Did You Really Expect Something for Nothing? (September 1997). NBER Working Paper No. w6199. Available at SSRN: http://ssrn.com/abstract=225957

Contact Information

Don Fullerton (Contact Author)
University of Illinois at Urbana-Champaign - Department of Finance ( email )
1206 South Sixth Street
Champaign, IL 61820
United States
(217) 244-3621 (Phone)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
CESifo (Center for Economic Studies and Ifo Institute)
Poschinger Str. 5
Munich, DE-81679
Germany
Gilbert E. Metcalf
Tufts University - Department of Economics ( email )
Medford, MA 02155
United States
617-627-3685 (Phone)
617-627-3917 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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