Green Tax Reform and Competitiveness

University of Munich, Center for Economic Studies Working Paper No. 176

Posted: 25 Feb 1999

See all articles by Erkki Koskela

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

Ronnie Schöb

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

Hans-Werner Sinn

CESifo (Center for Economic Studies and Ifo Institute); National Bureau of Economic Research (NBER); Ludwig Maximilian University of Munich (LMU)

Multiple version iconThere are 2 versions of this paper

Date Written: December 1998

Abstract

This paper develops a model of a small open economy that produces an export good with domestic labour and imported energy and is stuck in an unemployment situation resulting from an excessive fixed net-of-tax wage rate. We study a revenue-neutral green tax reform that substitutes energy for wage taxes. A moderate green tax reform will boost employment, improve welfare and increase the economy's competitiveness. The driving force behind these results is the technological substitution process that a green tax reform will bring about by inducing the producers to substitute labour for energy as factors of production. The resulting reduction in unemployment is welfare increasing since energy, which the country has to buy at its true national opportunity cost, is replaced with labour, whose price is above its social opportunity cost. As long as the labour tax rate exceeds the resource tax rate, a revenue-neutral green-tax reform will reduce the domestic firms' unit cost of production and hence increasing international competitiveness and output of the economy.

JEL Classification: H20, J51

Suggested Citation

Koskela, Erkki and Schöb, Ronnie and Sinn, Hans-Werner, Green Tax Reform and Competitiveness (December 1998). University of Munich, Center for Economic Studies Working Paper No. 176. Available at SSRN: https://ssrn.com/abstract=148478

Erkki Koskela

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

P.O. Box 54
FIN-00014 Helsinki
Finland
+358 9 191 8894 (Phone)
+358 9 191 8877 (Fax)

HOME PAGE: http://www.cesifo.de/servlet/page?_pageid=56&_dad=portal30&_schema=PORTAL30&pa_id=7298

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Bank of Finland - Research Department ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Ronnie Schöb (Contact Author)

Freie Universitaet Berlin ( email )

Boltzmannstraße 20
Berlin, Berlin 14195
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Hans-Werner Sinn

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany
+49 89 9224 1276 (Phone)
+49 89 9224 1409 (Fax)

HOME PAGE: http://www.cesifo.de

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Ludwig Maximilian University of Munich (LMU)

Geschwister-Scholl-Platz 1
Munich, Bavaria 80539
Germany

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