Health Effects, Tax Deductions for Medical Expenditure, and the Double Dividend

This paper presents a general-equilibrium model of environmental tax reform that introduces a health status depending on environmental quality and medical consumption, and tax deductions for medical expenditure. It distinguishes between two types of health effect: environmentally and medically induced. The first effect comes from better environmental quality and increases welfare, while the second comes from changes in medical consumption and produces welfare losses. However, a generalized model shows that welfare gains produced by the presence of tax deductions can offset the medically induced health effect when the initial medical consumption level is sufficiently high. Therefore, this paper explains that identifying budgetary characteristics of medical services may lead to the nonenvironmental dividend.