Abstract
We analyse the effect of adoption of a carbon tax on the effective labour tax rates using a difference-in-difference framework in which we incorporate staggered treatment adoption and account for heterogeneous causal effects. We use data on 143 countries during 1985-2018. We conduct our analysis using DID estimation developed by Borusyak et al. (2024) and Callaway & Sant’Anna (2021) followed by sensitivity analysis and placebo tests. We find that enacting a carbon tax on an average lowers the labour tax rate by 1.32 percent points. In country-specific analysis we find that carbon tax implementation is reducing labour tax by around 3.57 % for Sweden and Norway, however, the effect is insignificant for Denmark. Our findings indicate that implementing a carbon tax can help to reduce the tax burden on labour. Countries experiencing substantial welfare losses due to their present tax structure might implement carbon taxes as a means to mitigate these losses.
Published Version
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