Environmental Tax Reform and Growth: Income Tax Cuts or Profits Tax Reduction

Nakada, Minoru (2010): Environmental Tax Reform and Growth: Income Tax Cuts or Profits Tax Reduction. Published in: Environmental and Resource Economics , Vol. 47, (7 August 2010): pp. 549-565.

Abstract

This study investigates how recycling revenues, which are generated by environmental taxes, affect growth through different types of tax cuts. A growth model with creative destruction (Aghion and Howitt Econometrica 60(2):323–351,1992, Aghion and Howitt The economics of growth, 2009) is modified to include the production of final output as a source of pollution. This paper demonstrates that introducing an environmental tax, accompanied by either an income tax cut or a profits tax reduction, increases the output growth rate. The analysis also shows that, if technological change is resulted from deliberate activities of economic agents, the reduction of the profits tax rate for an intermediate monopolist is more growth-enhancing than an income tax cut since a profits tax reduction directly promotes R&D activities.

• Item Type: MPRA Paper
• Language: English
• Keywords: Environmental Policy, Environmental Tax Reform, Endogenous Growth
• Subjects: H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H23 - Externalities ; Redistributive Effects ; Environmental Taxes and Subsidies; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O41 - One, Two, and Multisector Growth Models; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q5 - Environmental Economics > Q58 - Government Policy

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