| In recent literature, there has been much debate about the possibility of a double dividend resulting from environmental taxation when there are preexisting tax distortions. The double dividend hypothesis states that environmental taxes yield two benefits to society: a cleaner environment and a less distortionary tax system. This thesis demonstrates that, under a single branch of government, higher tax revenues are generated when the taxed commodities are complementary to a cleaner environment than in an economy where pollution emissions do not affect consumer demands for private goods. This improves the likelihood of a double dividend.;The next part of the thesis explicitly recognizes that government decision-making is fragmented. In particular, two branches of government are assumed, a "tax authority" and a "regulatory branch." Higher taxes on "dirty consumption" are found to discourage regulation of pollution emissions. As a result, the tax authority can offset overregulation by increasing its taxes on dirty consumption. However, an increase in the optimal tax rate is mitigated because of the loss in welfare, known as "deadweight loss," associated with the regulatory branch receiving a portion of the tax revenue as monetary compensation (a "transfer"). Within this model, the double dividend fails to hold when the regulatory branch has a high preference for personal income and the positive feedback on the transfer from increased regulation is sufficiently small. In contrast, the double dividend holds when the regulatory branch has a high preference for environmental quality and the deadweight loss effect is sufficiently small.;Finally, under unified government and imperfectly observable emissions, increasing the weight the government decision-maker places on firms (tax revenue) relative to consumers reduces (has an ambiguous effect on) the incentive to tax emissions and raises (lowers) the incentive to tax output. In contrast, under divided government and imperfectly observable emissions, increasing the weight the decision-makers in the regulatory branch place on firms (tax revenue) relative to consumers lowers the regulatory branch's incentive to control emissions, raises (has an ambiguous effect on) the tax authority's incentive to tax emissions, and increases the tax authority's incentive to tax output. |
