Optimal environmental tax swaps and double dividend hypothesis

TL;DR

This paper investigates how optimal allocation of environmental tax revenues can maximize welfare and output in an overlapping-generations model considering pollution-related health damages.

Contribution

It introduces an analysis of optimal tax revenue allocation between pollution abatement and labor income to improve welfare and output in a novel overlapping-generations framework.

Findings

Optimal allocations maximize steady-state welfare and per-worker output.

Shifting tax revenues towards labor income can increase welfare but reduce output.

The model incorporates pollution-related health damages into economic analysis.

Abstract

Taking environmental tax rate as given, is there an optimal allocation of tax revenues to benefit economic variables? This paper analyzes this issue in an overlapping-generations model with the pollution-related health damage. It finds the optimal allocations towards pollution abatement and labor income to maximize the steady-state lifetime welfare and per-worker output, respectively. Moreover, a greater shift towards labor income might enhance steady-state welfare while reducing per-worker output.