Optimality of relaxing revenue-neutral restrictions in green tax reforms

Abstract

Green Tax Reforms [GTR] have been initially devised as a policy proposal to tackle simultaneously several political goals. Recent fiscal stress episodes have defied this view. In this paper, we assess a key issue of interest for policymakers: departing from a fiscal system that does not include any environmental tax, would the tax menu resulting from the implementation of revenue-neutral GTR be the closest available to the optimal one? Our work illustrates in a simple, parametrized model that the answer is negative. These findings deviate from general wisdom and provide theoretical support for the third generation of GTR.