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


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.


Environmental policy Environmental tax reform Endogenous growth 


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Aghion P, Howitt P (1992) A model of growth through creative destruction. Econometrica 60(2): 323–351CrossRefGoogle Scholar
  2. Aghion P, Howitt P (2009) The economics of growth. MIT Press, CambridgeGoogle Scholar
  3. Barro RJ, Sala-i-Martin X (2003) Economic growth. MIT Press, CambridgeGoogle Scholar
  4. Bovenberg AL, de Mooij R (1994) Environmental levies and distortionary taxation. Am Econ Rev 94(4): 1085–1089Google Scholar
  5. Bovenberg AL, de Mooij R (1997) Environmental tax reform and endogenous growth. J Public Econ 63: 207–237CrossRefGoogle Scholar
  6. Bovenberg AL, Smulders SA (1995) Environmental quality and pollution-argumenting technological change in a two-sector endogenous growth model. J Public Econ 57: 369–391CrossRefGoogle Scholar
  7. Bovenberg AL, Smulders SA (1996) Transitional impacts of environmental policy in an endogenous growth model. Int Econ Rev 37(4): 861–893CrossRefGoogle Scholar
  8. Bovenberg AL, Van der Ploeg F (1998) Consequences of environmental tax reform for unemployment and welfare. Environ Resour Econ 12(2): 137–150CrossRefGoogle Scholar
  9. Christainsen GB, Haveman RH (1981) Public regulations and the slowdown in productivity growth. Am Econ Rev 71(2): 320–325Google Scholar
  10. Devereux MB, Love DRF (1995) The dynamic effects of government spending policies in a two-sector endogenous growth model. J Money, Credit Bank 27(1): 232–256CrossRefGoogle Scholar
  11. Elbasha EH, Roe TL (1996) On endogenous growth: the implications of environmental externalities. J Environ Econ Manage 31: 240–268CrossRefGoogle Scholar
  12. Fullerton D, Kim SR (2008) Environmental investment and policy with distortionary taxes, and endogenous growth. J Environ Econ Manage 56(2): 141–154CrossRefGoogle Scholar
  13. Futagami K, Morita Y, Shibata A (1993) Dynamic analysis of an endogenous growth model with public capital. Scand J Econ 95(4): 607–625CrossRefGoogle Scholar
  14. Gerlagh R, van der Zwaan BCC (2001) The effects of ageing and an environmental trust fund in an overlapping generations model on carbon emission reductions. Ecol Econ 36(2): 311–326CrossRefGoogle Scholar
  15. Gerlagh R, Kverndokk S, Rosendahl K (2009) Optimal timing of climate change policy; interaction between carbon taxes and innovation externalities. Environ Resour Econ 43(3): 369–390CrossRefGoogle Scholar
  16. Gollop FM, Roberts MJ (1983) Environmental regulations and productivity growth: the case of fossil-fueled electric power generation. J Polit Econ 91(4): 654–674CrossRefGoogle Scholar
  17. Greiner A (2005) Fiscal policy in an endogenous growth model with public capital and pollution. Japanese Econ Rev 56(1): 67–84CrossRefGoogle Scholar
  18. Grimaud A (1999) Pollution permits and sustainable growth in a schumpeterian model. J Environ Econ Manage 38: 249–266CrossRefGoogle Scholar
  19. Grimaud A (2000) Environmental policies, pollution and growth in a model with vertical innovations. In: Ouestlati W, Rotillon G (eds) Macroeconomic perspectives on environmental concerns. Edward Elgar, LondonGoogle Scholar
  20. Grossman GM, Helpman E (1991) Quality ladders in the theory of growth. Rev Econ Studies 58(1): 43–61CrossRefGoogle Scholar
  21. Hart R (2004) Growth, environment and innovation, a model with production vintages and environmentally oriented research. J Environ Econ Manage 48: 1078–1098CrossRefGoogle Scholar
  22. Hettich F (1998) Growth effects of a Revenue-neutral environmental tax reform. J Econ 67(3): 287–316Google Scholar
  23. Howitt P (2000) Endogenous growth and cross-country income differences. Am Econ Rev 90(4): 829–846CrossRefGoogle Scholar
  24. Koskela E, Schöb R (1999) Alleviating unemployment: the case for green tax reforms. Eur Econo Rev 43(9): 1723–1746CrossRefGoogle Scholar
  25. Michel P, Rotillon G (1995) Disutility of pollution and endogenous growth. Environ Resou Econ 6(3): 279–300Google Scholar
  26. Nakada M (2004) Does environmental policy necessarily discourage growth?.  J Econ 81(3): 249–275CrossRefGoogle Scholar
  27. Oates WE (1995) Green taxes: can we protect the environment and improve the tax systemat the same time?. South Econ J 61(4): 915–922CrossRefGoogle Scholar
  28. Ono T (2007) Growth and welfare effect of an environmental tax-based public pension reform. Japanese Econ Rev 58(3): 362–381CrossRefGoogle Scholar
  29. Ono T (2008) Environmental tax reform in an overlapping-generations economy with involuntary unemployment. Environ Econ Policy Studies 9: 213–238Google Scholar
  30. Parry IWH (1995) Pollution taxes and revenue recycling. J Environ Econ Manage 29(3): S64–S77CrossRefGoogle Scholar
  31. Porter ME, van der Linde C (1995) Toward a new competition of the environmental competitiveness relationship. J Econ Perspect 9(4): 97–118Google Scholar
  32. Ricci F (2007) Environmental policy and growth when inputs are differentiated in pollution intensity. Environ Resour Econ 38(3): 285–310CrossRefGoogle Scholar
  33. Romer PM (1990) Endogenous technological change. J Polit Econ 98(5): s71–s102CrossRefGoogle Scholar
  34. Turnovsky SJ (2000) Fiscal policy, elastic labor supply, and endogenous growth. J Monet Econ 45(1): 185–210CrossRefGoogle Scholar
  35. Verdier T (1995) Environmental pollution and endogenous growth. In: Carraro C, Filar JA (eds) Control and game-theoretic models of the environment. Birkhauser, Basel, pp 175–200Google Scholar

Copyright information

© Springer Science+Business Media B.V. 2010

Authors and Affiliations

  1. 1.Graduate School of Environmental StudiesNagoya UniversityNagoyaJapan

Personalised recommendations