Environmental Tax Reform and Income Distribution with Imperfect Heterogeneous Labour Markets

Diane Aubert (1) , Mireille Chiroleu-Assouline (2, 3, 4)

1 ETH Zürich - Eidgenössische Technische Hochschule - Swiss Federal Institute of Technology [Zürich]
2 PSE - Paris School of Economics
3 PJSE - Paris Jourdan Sciences Economiques
4 ECO-PUB - Economie Publique

This paper investigates the distributional and efficiency consequences of an environmental tax reform that distributes the revenue from a green tax according to varying labour tax rates. We build a general equilibrium model with heterogeneous workers, imperfect labour markets (search and match), and pollution consumption externalities. Preferences are non-homothetic (Stone-Geary utility) to take into account the potential regressivity of green taxes (the polluting good is assumed to be a necessary good). If the reform appears regressive, the gains from the double dividend can achieve Pareto improvement, using a redistributive non-linear income tax if the redistribution is not too great initially. Increasing progressivity influences the unemployment rate and can moderate the trade-off between equity and efficiency. We finally provide numerical illustrations for France and conduct sensitivity analysis.

Mots clés: Tax progressivity; Welfare analysis; Environmental tax reform; Heterogeneity; Unemployment

Domaines: Economies et finances

Diane Aubert, Mireille Chiroleu-Assouline. Environmental Tax Reform and Income Distribution with Imperfect Heterogeneous Labour Markets. European Economic Review, 2019, 116, pp.60-82. ⟨10.1016/j.euroecorev.2019.03.006⟩. ⟨halshs-02095150⟩