double-dividend hypothesis

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The claim that a tax levied on an activity causing a negative externality both reduces the externality problem and raises tax revenue, thus allowing other distortionary taxes to be reduced. For example, the introduction of a carbon tax will decrease carbon emissions and raise revenue, thus permitting a reduction in the rate of income tax or profit tax. The idea of a double-dividend is intuitively compelling, but it has proved difficult to demonstrate in formal models.

Subjects: Economics.

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