The Initial Incidence of a Carbon Tax across Income Groups

Although carbon taxes are regressive, how the revenue is used—to cut capital taxes, given as a lump sum rebate, or for a labor tax swap—impacts how much the poorest populations are affected.

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Date

Aug. 7, 2014

Authors

Roberton C. Williams III, Hal Gordon, Dallas Burtraw, Jared Carbone, and Richard D. Morgenstern

Publication

Working Paper

Reading time

1 minute

Carbon taxes efficiently reduce greenhouse gas emissions but are criticized as regressive. This paper links dynamic overlapping-generation and microsimulation models of the United States to estimate the initial incidence. We find that while carbon taxes are regressive, the incidence depends much more on how carbon tax revenue is used. Recycling revenues to cut capital taxes is efficient but exacerbates regressivity. Lump-sum rebates are less efficient but much more progressive, benefiting the three lower income quintiles even when ignoring environmental benefits. A labor tax swap represents an intermediate option, more progressive than a capital tax swap and more efficient than a rebate.

This paper is now published in the National Tax Journal. The citation is below.

“The Initial Incidence of a Carbon Tax Across Income Groups,” 2015 (Roberton C. Williams III, Hal Gordon, Dallas Burtraw, Jared C. Carbone, and Richard D. Morgenstern), National Tax Journal, March, 68(1): 195-214.

Topics

Authors

Roberton C. Williams III

Senior Fellow

Rob Williams is a senior fellow at RFF. He studies both environmental policy and tax policy, with a particular focus on interactions between the two.

Hal Gordon

Dallas Burtraw

Darius Gaskins Senior Fellow

Dallas Burtraw is the Darius Gaskins Senior Fellow at RFF. Burtraw’s research includes analysis of the distributional and regional consequences of climate policy and the evolution of electricity markets, including renewables integration.

Jared Carbone

Richard D. Morgenstern

Senior Fellow

Richard Morgenstern is a senior fellow at RFF. His research focuses on the economic analysis of environmental issues with an emphasis on the costs, benefits, evaluation, and design of environmental policies.

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