Green Tax Reform in Australia in the Presence of Improved Environment-Induced Productivity Gain: Does it Offer Sustainable Recovery from a Post-COVID-19 Recession?

Maruf Maxim,Kerstin Zander

doi:10.2139/ssrn.3682643

Abstract

Disasters and pandemics such as COVID-19 will change the world in many ways and the road to redemption from the ongoing economic distress may require a novel approach. This paper proposes a path towards economic recovery that keeps sustainability at the forefront. A computable general equilibrium model is used to simulate different green tax reform (GTR) policies for triple dividend (TD), consisting of lower emissions, higher GDP and higher employment. The GTR design consists of an energy tax coupled with one of three tax revenue recycle methods: (i) reduction of payroll tax, (ii) reduction of goods and services tax (GST) and (iii) a mixed-recycling approach. The paper also presents the impact of higher productivity on the tax reform simulations, which is a possible positive externality of lower emissions. The study is based on the Australian economy and the salient findings are twofold: (i) productivity gain in the GTR context improves the GDP and employment outcomes in all three different simulation scenarios and (ii) GST reduction has the highest TD potential, followed by reduction of payroll tax.

Highlights

The use of environmental taxation as a policy instrument to address the negative externalities of economic activities has been growing over the last several decades [1]
Our study concludes that a sustainable recovery from the post-COVID-19 recession is possible if green tax reform (GTR) is employed, even in the absence of any underlying productivity gain for two revenue recycling approaches, payroll tax reduction and goods and services tax (GST) reduction
We are not suggesting that this is the fastest way to recovery but addressing one of the common misconceptions that any form of environmental taxation yields environmental benefits at the cost of short-term economic contraction

Summary

Introduction

The impact of the improved environment that comes as a primary dividend of GTR on the additional economic dividend is largely absent in the existing literature It is worth investigating the interaction between lower emissions and productivity to understand how this may influence the performance of GTR. We design simulations based on these findings to test the performance of GTR in Australia This makes the paper unique and novel as (i) there is no other simulation study on GTR-driven TD in Australia and (ii) we include productivity gain that comes from improved environment in our simulation design to make the whole scenario more realistic, which is absent in the existing literature.

ORANI-G Model

Simulation Scenarios

Model Closures

Results and Discussion

Concluding Remarks and Policy Implications

Coefficients in the core database