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Up or down? On Green Taxes` Effect on the Excess Burden

 

In the literature on green tax reforms, several authors have argued that a revenue neutral green tax reform in most cases will tend to exacerbate pre-existing distortions and increase the excess burden. In this paper it is argued that such a conclusion seems to be based on a misconception of how the excess burden or degree of overall distortions ought to be defined and measured. Once we adopt a standard measure of the excess burden, it is shown that a green tax reform will reduce in the excess burden under fairly mild requirements. Since economists’ advice concerning efficiency matters often are powerful arguments for political decision making, we ought to take care in not giving the wrong advice.