Duality of tax inflation and its impact on emissions

Abstract

The relationship between tax inflation and environmental emissions presents a complex duality that demands closer analysis. On one hand, rising tax levels, especially under inflationary pressures, can incentivize firms to invest in cleaner technologies to avoid escalating compliance costs. On the other hand, inflation-induced tax burdens may redirect corporate investments away from sustainable initiatives, leading to increased emissions. This study explores the dual impact of tax inflation by examining how fiscal pressures affect enterprise behavior concerning environmental performance. Using a mixed-methods approach, combining macroeconomic data analysis with industry-specific case studies, the research reveals that moderate tax inflation can foster emissions reduction through cost-driven innovation, while excessive tax inflation exacerbates environmental degradation by reducing firms' financial flexibility. The findings highlight the necessity for balanced fiscal policies that align environmental objectives with economic realities. The study contributes to the literature by uncovering the non-linear dynamics between tax inflation and emission trends, offering policy recommendations for achieving sustainable economic and ecological outcomes.