A Short-Run Distributional Analysis of a Carbon Tax in the United States

by: Anders Fremstad, Mark Paul

May 03, 2017 |
Working Paper

Most economists view a carbon tax as an efficient way to reduce greenhouse gas emissions. Nevertheless, this policy approach does not enjoy widespread public support. One factor could be the distributional impacts of a carbon tax.  Under some types of tax design, the carbon tax will be regressive—i.e. the tax will entail higher proportional costs for lower-income households. Anders Fremstad and Mark Paul examine the distributional impacts at the household level of placing an economy-wide tax on carbon dioxide. They compare this with revenue-neutral recycling policies, including a labor tax cut and an Old-Age, Survivor, and Disability Insurance payroll tax cut. They find that a tax-and-dividend policy is the most equitable option, and also the most politically feasible.

Abstract

This paper examines the distributional impacts of a $50 tax per ton of CO2. Using Input-Output tables we calculate the carbon intensity of goods to estimate households’ carbon footprints. Findings indicate the tax is regressive. Using the revenue to reduce taxes on labor leaves 60 percent of people worse off, while rebating the revenue in equal dividends increases welfare for 55 percent of individuals, including 84 percent in the bottom half of the distribution. Many economists have dismissed dividends on efficiency grounds, but we show that potential macroeconomic benefits of tax cuts are insufficient to protect the poor.

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