Dividends of Environmental Tax with Endogenized Time and Medical Expenditures

Health effects of medical expenditures deserve consideration in the literature addressing the dividends of environmental taxation, since illness not only influences utility, but also affects leisure and working time. We for the first time differentiate the health effects and tax deductibility between medical treatment expenditure and illness prevention expenditure, and redefine the marginal social damage (MSD) of dirty goods consumption that was found incorrectly measured before. After modifying the health production function and redefining MSD, we use the traditional decomposition approach to derive a new source of dividends, named “prevention-based tax-interaction effect”, that, however, is negative in sign and weakens the second dividend. As an alternative approach, a social planning model is presented and simulation implemented. With tax neutrality, revenue raised from environmental tax is used to reduce income tax rate. The results, while confirming the first dividend, indicate that the tax reform increases neither the monetary value of utility nor labor employment. Nevertheless, an optimal bundle of income tax and environmental tax might exist that minimizes the potential welfare loss. See above See above