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Using energy and emissions taxation to finance labor tax reductions in a multi-sector economy: An assessment with EMuSe

Natascha Hinterlang, Anika Martin, Oke Röhe, Nikolai Stähler and Johannes Strobel

No 50/2021, Discussion Papers from Deutsche Bundesbank

Abstract: In this paper, we introduce a closed-economy version of the dynamicenvironmental multi-sector general equilibrium modelEMuSeto analyze the effects of financing a labor tax reduction through higher consumption, energy or emissions taxation.We find that, for sufficiently high environmental damage, using energy and emission taxes as the financing instrument eventually outperforms the use of consumption taxes due to a positive productivity-like shock. However, it takes time for the positive effects to materialize. Manufacturing, transportation and energy production sectors tend to lose (or gain only a little) while administration, services and research sectors tend to benefit from the implementation of an environmental taxation as a financing instrument. As demand shifts towards sectors less affected by the tax shift, the aggregate economic effects are different in the multi-sector economy compared to a conventional one-sector-economy framework.

Keywords: EMuSe; Dynamic General Equilibrium Model; Sectoral Heterogeneity; Environmental Tax Policy; Input-Output Matrix (search for similar items in EconPapers)
JEL-codes: E32 E50 E62 H32 Q58 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-dge, nep-ene, nep-env, nep-mac and nep-pub
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