Short and Long-Term Effects of Environmental Tax Reform

Abstract

This paper examines the macroeconomic e¤ects of an environmental tax reform in a growing economy. A model of endogenous growth based on human capital accumulation is used to numerically simulate the growth e¤ects of di¤erent enironmental tax reforms and compute their impact on welfare in the short and the long-term. Our results suggest that the magnitude of these e¤ects depends on the type of tax reform. Thus, only environmental tax reform that aims to use the revenue from environmental tax to reduce wage tax and increase the proportion of public spending within GDP, enhance both growth and welfare in the long-term. However, the short-term e¤ect remain negative.

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