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Uncertainty and the double dividend hypothesis

Published online by Cambridge University Press:  01 October 2009

EFTICHIOS S. SARTZETAKIS  and
PANAGIOTIS D. TSIGARIS
EFTICHIOS S. SARTZETAKIS
Affiliation:
Department of Accounting and Finance, University of Macedonia, 156 Egnatia Str., Thessaloniki 54006, Greece. Email: [email protected].
PANAGIOTIS D. TSIGARIS
Affiliation:
Department of Economics, Thompson Rivers University
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Abstract

This paper examines the double dividend hypothesis in the presence of labour income uncertainty. Empirical evidence shows that uncertainty over labour income is particularly significant in developing, while not negligible in developed countries. Under uncertainty, and assuming incomplete capital markets, the tax system plays a role in providing social insurance, and a green tax reform influences its effectiveness. We show that the increase in environmental tax reduces consumption risk, while the balanced budget decrease in labour income tax increases income risk. We find that the total welfare effect of a green tax reform differs substantially from the case of certainty. The critical parameters determining the existence of a second dividend are the lump-sum transfers, the relative substitutability of the two goods for leisure, and the initial tax rates relative to their optimal that determine also the response of labour supply to a change in the tax mix.

Type
Research Article
Information
Environment and Development Economics , Volume 14 , Issue 5 , October 2009 , pp. 565 - 585
Copyright
Copyright © Cambridge University Press 2009

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