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Environmental and Resource Economics

, Volume 47, Issue 4, pp 549–565 | Cite as

Environmental Tax Reform and Growth: Income Tax Cuts or Profits Tax Reduction

  • Minoru NakadaEmail author
Article

Abstract

This study investigates how recycling revenues, which are generated by environmental taxes, affect growth through different types of tax cuts. A growth model with creative destruction (Aghion and Howitt Econometrica 60(2):323–351,1992, Aghion and Howitt The economics of growth, 2009) is modified to include the production of final output as a source of pollution. This paper demonstrates that introducing an environmental tax, accompanied by either an income tax cut or a profits tax reduction, increases the output growth rate. The analysis also shows that, if technological change is resulted from deliberate activities of economic agents, the reduction of the profits tax rate for an intermediate monopolist is more growth-enhancing than an income tax cut since a profits tax reduction directly promotes R&D activities.

Keywords

Environmental policy Environmental tax reform Endogenous growth 

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Copyright information

© Springer Science+Business Media B.V. 2010

Authors and Affiliations

  1. 1.Graduate School of Environmental StudiesNagoya UniversityNagoyaJapan

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