The double dividend : revenue neutral environmental tax reform and income distribution

The concept of revenue neutral environmental tax reform has been around since the early 1970's when the concept of taxing an economic 'bad', e.g., pollution, and using the revenue raised to reduce distortionary taxation was postulated by Sandmo (1973). The basic premise is that such tax reform has a two-fold benefit - a double dividend. The first dividend comes from the impact of the environmental tax on the externality in question and the second divided arises from the beneficial efficiency effect on the tax system resultant from the fall in the level of distortionary taxation. Although a large literature on this issue has built up on this issue in recent years, there has been a significant omission in that the distributional implications of such tax reform have been neglected. The purpose of this thesis is to investigate the consequences, of raising the tax rate on the economic bad and using the revenue gained to reduce the tax rate on an economic good, on the distribution of income. The methodology employed is a progression from a simple theoretical model to a complex computable general equilibrium framework.