The Hidden Impact of Abatement Tax Incentives on the Labor Share

This paper investigates how tax incentives for abatement investment affect the labor share and aggregate abatement investment. Micro-level data from Colombia’s manufacturing industry reveals a strong negative correlation between abatement investment and labor share, with no association to capital investment. An industry dynamics model shows that a 20% income tax deduction for pollution control reduces the labor share by 20% due to a shift toward capital-intensive firms, increasing abatement investment by 45%. Similarly, a carbon tax decreases the labor share and boosts abatement investment, while higher corporate taxes raise the labor share but reduce abatement investment. These findings highlight the importance of carefully designed tax incentives to achieve economic and environmental objectives.