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Green Tax Reform and Competitiveness

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  • Erkki Koskela
  • Ronnie Schob
  • Hans-Werner Sinn

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 increase international competitiveness and output of the economy.

Suggested Citation

  • Erkki Koskela & Ronnie Schob & Hans-Werner Sinn, 1999. "Green Tax Reform and Competitiveness," NBER Working Papers 6922, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:6922
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    1. de Bovenberg, A Lans & Mooij, Ruud A, 1994. "Environmental Levies and Distortionary Taxation," American Economic Review, American Economic Association, vol. 84(4), pages 1085-1089, September.
    2. Alesina, Alberto & Perotti, Roberto, 1997. "The Welfare State and Competitiveness," American Economic Review, American Economic Association, vol. 87(5), pages 921-939, December.
    3. Erkki Koskela & Ronnie Schöb & Hans-Werner Sinn, 1998. "Pollution, Factor Taxation and Unemployment," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 5(3), pages 379-396, July.
    4. Erkki Koskela & Ronnie Schöb, 2002. "Alleviating Unemployment: The Case for Green Tax Reforms," Chapters, in: Lawrence H. Goulder (ed.), Environmental Policy Making in Economies with Prior Tax Distortions, chapter 20, pages 355-378, Edward Elgar Publishing.
    5. Bucovetsky, Sam & Wilson, John Douglas, 1991. "Tax competition with two tax instruments," Regional Science and Urban Economics, Elsevier, vol. 21(3), pages 333-350, November.
    6. Wolfram Richter & Kerstin Schneider, 2001. "Taxing Mobile Capital with Labor Market Imperfections," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 8(3), pages 245-262, May.
    7. Bovenberg, A Lans & de Mooij, Ruud A, 1997. "Environmental Levies and Distortionary Taxation: Reply," American Economic Review, American Economic Association, vol. 87(1), pages 252-253, March.
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    Cited by:

    1. repec:bla:germec:v:9:y:2008:i::p:17-40 is not listed on IDEAS
    2. Reto Schleiniger & Stefan Felder, "undated". "Fossile Energiepolitik jenseits von Kyoto," IEW - Working Papers 078, Institute for Empirical Research in Economics - University of Zurich.
    3. O'Ryan, Raúl & de Miguel, Carlos J. & Miller, Sebastian & Munasinghe, Mohan, 2005. "Computable general equilibrium model analysis of economywide cross effects of social and environmental policies in Chile," Ecological Economics, Elsevier, vol. 54(4), pages 447-472, September.
    4. Stefan Boeters, 2004. "Green Tax Reform and Employment: The Interaction of Profit and Factor Taxes," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 60(2), pages 222-239, August.
    5. Max Albert & Jürgen Meckl, 2001. "Green Tax Reform and Two-Component Unemployment: Double Dividend or Double Loss?," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 157(2), pages 265-281, June.
    6. Rentschler, Jun & Kornejew, Martin, 2017. "Energy price variation and competitiveness: Firm level evidence from Indonesia," Energy Economics, Elsevier, vol. 67(C), pages 242-254.
    7. Thomas Aronsson, 2005. "Environmental Policy, Efficient Taxation and Unemployment," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 12(2), pages 131-144, March.
    8. Rentschler, Jun & Kornejew, Martin & Bazilian, Morgan, 2017. "Fossil fuel subsidy reforms and their impacts on firms," Energy Policy, Elsevier, vol. 108(C), pages 617-623.
    9. Ulrich Steger & Wouter Achterberg (†) & Kornelis Blok & Henning Bode & Walter Frenz & Corinna Gather & Gerd Hanekamp & Dieter Imboden & Matthias Jahnke & Michael Kost & Rudi Kurz & Hans G. Nutzinger &, 2005. "Sustainable Development and Innovation in the Energy Sector," Springer Books, Springer, number 978-3-540-26882-6 edited by Friederike Wütscher, February.

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    More about this item

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects

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