Environmental Tax Reform and Income Distribution with Imperfect Heterogeneous Labor Markets

Résumé 0

This paper investigates the distributional and efficiency consequences of an environmental tax reform, when the revenue from the green tax is recycled by varying labor tax rates. We build a general equilibrium model with imperfect heterogeneous labor markets, pollution consumption externalities, and non-homothetic preferences (Stone-Geary utility). We show that in the case where the reform appears to be regressive, the gains from the double dividend can be made Pareto improving by using a redistributive non-linear income tax if redistribution is initially not too large. Moreover, the increase of progressivity acts on unemployment and can moderate the trade-off between equity and efficiency. We finally provide numerical illustrations for three European countries featuring different labor market behaviors. We show that a double dividend may be obtained without worsening the initial inequalities if the green tax revenues are redistributed with a progressivity index lower for France than for Germany and UK.