The double dividend: Miracle or fata morgana?

Abstract

The discussion on an ecological tax reform has as a central element the idea of a double dividend: to get a better environment, a better tax system with less distortions, and therefore more growth and employment with the one and same stroke. Is it a miracle or fata morgana? In Germany, this discussion came to a halt when the country's comparative disadvantages within the globalization process became painfully apparent and the political emphasis shifted towards (still unsuccessful) attempts to social and structural reforms. The article sheds some light on problems which presumably would have occurred if the strategy of the double dividend had been implemented – or which could occur in the future if the occasion arises. It is shown that technical progress could lead to abrupt losses in tax revenues and provoke counter-strategies in the political sector to secure the economic dividend, which are analyzed from welfare economic and political economic perspectives. The findings are that, due to political self-interest, only low tax solutions (in the inelastic part of the marginal abatement cost curve) would be chosen, which implies that the double dividend strategy does not seem to be a politically feasible route to reach strict environmental goals. It is further shown that these tax rates would be near to the maximum revenue rate, and that this would also be the dominant strategy for all politicians irrespective of their individual value-orientation. The conclusion is that theoretically a double dividend policy will be far from a miracle and that the political approach to it will presumably turn it into a fata morgana.