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Environmental Taxation, Employment and Public Spending in Developing Countries

Karlygash Kuralbayeva

Environmental & Resource Economics, 2019, vol. 72, issue 4, 877-912

Abstract: Abstract This paper investigates the consequences of environmental tax reforms for unemployment and welfare, in the case of developing countries with a large informal sector, rural–urban migration, and three different assumptions about public spending: (1) as part of a revenue-neutral policy, (2) fixed, and (3) varying endogenously. Under the indexation of unemployment benefits and informal-sector income that give rise to a double dividend, a lower level of public spending is associated with a smaller negative impact on the after-tax income of households and a higher increase in employment. These policies, however, still lead to a reduction in social welfare; even more so in the case of endogenous public spending, although it is associated with a higher increase in employment and a smaller reduction in private-sector incomes. The model implies that complementary policy, in terms of lower public spending, is unlikely to be socially acceptable, and does not support the case for a green tax reforms in developing countries.

Keywords: Informal sector; Matching frictions; Rural–urban migration; Pollution taxes; Double dividend (search for similar items in EconPapers)
JEL-codes: H20 H23 H30 (search for similar items in EconPapers)
Date: 2019
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