Stijn Van Houtven - Green Tax Reform: Labour supply impact of increased prices and revenue recycling.

  • Presenting author: Stijn Van Houtven (KU Leuven)

  • Authors: Bart Capéau, André Decoster, Stijn Van Houtven

  • Session: B03D - Environment - Tuesday 14:00-15:30 - Erika-Weinzierl Hall

  • Slides: PDF

A tax reform aimed at reducing greenhouse gas emissions will increase prices of emission-intensive goods. The additional revenue can be recycled by lowering distortionary taxes in the economy, such as taxes on labour income. To evaluate the labour supply impact of such a reform, one needs to account for both the reform in labor taxation, and the change in consumer prices the household faces. It is indeed the net real wage which determines the labour supply decision of the household, and the impact of price changes will depend on the heterogeneous preferences over consumption. We propose a framework linking the EUROMOD Indirect tax tool with a random utility random opportunity (RURO) job choice model, to evaluate such green tax reform, accounting for the heterogeneity in preferences and opportunities. The linkage is consistent with two stage budgeting in the household maximization problem. Moreover, the green tax reform most likely causes changes in the labour demand for certain labour types. The RURO model is equipped to take into account such feedback channel, since it explicitly models the opportunities households have on the labour market. We apply the framework to different scenarios for green tax reform in Belgium.