Environmental-tax-financed social security tax cuts and the double dividend

This paper presents a two-period overlapping-generations model in which (i) firms create environmentally harmful emissions as by-products of production, and (ii) social security tax revenue from the working young is transferred to the retired elderly as pay-as-you-go social security benefits. In this framework, the paper considers a revenue-neutral reform in which the government undertakes an environmental-tax-financed social security tax cut; the environmental-tax revenue is utilized as a means of financing social security benefits. It is shown that the reform attains a double dividend - namely, improvement is demonstrated in both the nonenvironmental and the environmental utility - when (i) the economy attains a dynamically inefficient equilibrium, (ii) the share of capital (labor) is low (high), and (iii) the social security tax rate before the reform lies within a certain range.