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[email protected] and Gilbert E. Metcalf Department of Economics Tufts University Medford, MA 02155 and NBER
[email protected] August 1997 This paper was prepared for a "Symposium on Second-Best Theory" to appear in the Chicago- Kent Law Review. We are grateful for helpful comments and suggestions from Charles Ballard, Larry Goulder, Ian Parry and Kerry Smith. The first author is grateful for financial support from a grant of the Environmental Protection Agency (EPA R824740-01-0), and the second author is grateful for financial support from a grant of the National Science Foundation to the National Bureau of Economic Research (NSF SBR-9514989). This paper is part of NBER's research program in Public Economics. Any opinions expressed are those of the authors and not those of the EPA, the NSF, or the National Bureau of Economic Research. Environmental Taxes and the Double-Dividend Hypothesis: Did You Really Expect Something for Nothing? ABSTRACT The "double-dividend hypothesis" suggests that increased taxes on polluting activities can provide two kinds of benefits. The first dividend is an improvement in the environment, and the second dividend is an improvement in economic efficiency from the use of environmental tax revenues to reduce other taxes such as income taxes that distort labor supply and saving decisions.