The Feasibility of the Double-Dividend Hypothesis in a Democratic Economy

Abstract

The two dividends in the double-dividend hypothesis are assumed to be independent. This assumption can be misleading when it comes to formulating policy. I construct a model where the pollution tax rate is voted for by heterogeneous people. In addition to the revenue-recycling effect, the equilibrium pollution tax rate depends on two opposite forces: the tax-cutting effect and the profit effect. The two forces show that an instrument that exploits a greater revenue-recycling effect can cause a more severe environmental deterioration, thereby resulting in the infeasibility of the hypothesis. The introduction of the interdependence between the two dividends can also mean that non-revenue-raising instruments are more efficient than revenue-raising instruments.