Environmental tax reform: Short-term versus long-term macroeconomic effects

Abstract

This paper examines the macroeconomic effects of environmental tax reform in a growing economy. A model of endogenous growth based on human capital accumulation is used to simulate numerically the growth effects of different environmental tax reforms and calculate their impact on welfare in the short and the long-term. Our results suggest that the magnitude of these effects depends on the type of tax reform and the presence of a convex adjustment cost for investment. Although, the green tax reform that aims to use the revenue from environmental tax in order to reduce tax on wages is always growth improving, its long term welfare effects depend on the capital adjustment cost. Moreover, regardless of the tax reform scenarios, the short-term welfare effect is always negative.