Income-and Energy Taxation for Redistribution in General Equilibrium

In a 3-factor GE-model with a continuum of ability, the employed choose optimal labour supply, and equilibrium unemployment is determined by benefits funded by wage-and energy-taxes. Aggregate labour and the net wage may increase or decrease with taxation (and unemployment), and conditions for a reduction in redistributive wage-taxes to be Pareto-improving are derived. A small energy tax always raises the net wage, providing the wage tax is reduced to maintain constant employment and a balanced budget. High ability households prefer higher energy taxes when externalities are uniformly distributed and non-distorting.