Additional social welfare of environmental regulation: The effect of environmental taxes on income inequality

Abstract

This study utilizes the environmental tax reform in China as a quasi-natural experiment to investigate the effect of environmental taxes on income inequality. In January 2018, the Environmental Protection Tax Law (EPTL) came into effect in China, provinces began to collect environmental taxes in accordance with the law. We find that the reform contributes to lower within-firm wage inequality. The reform leads to declines in executive compensation and increases in worker wages. We further find that tax enforcement, environmental regulations, fiscal stress and tax competition vary the relationship between the reform and wage inequality. Heterogeneity analyses show that the effect is greater in non-state-owned firms, small firms, and firms with higher board shareholdings. Extensive robustness tests corroborate our inferences. This paper verifies the effectiveness of environmental regulation in enhancing social welfare, and is beneficial for assessing the welfare effects of environmental regulation more accurately. The findings can also help the government reduce obstacles in the implementation of environmental taxes, and further enhance the effectiveness of the EPTL.

Keywords: Environmental regulation; Environmental tax; Income inequality.