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Is Cap and Trade Fair to the Poor? Short-Sighted Households and the Timing of Consumption Taxes


Brian D. Galle


Boston College Law School

Manuel A. Utset


Florida State University College of Law

March 25, 2010

George Washington Law Review, Vol. 79, p. 33, 2010-2011
FSU College of Law, Public Law Research Paper No. 444
FSU College of Law, Law, Business & Economics Paper No. 10-4
Boston College Law School Legal Studies Research Paper No. 208

Abstract:     
Many forms of consumption tax, including recent proposals to impose a tax on the use of carbon, impose disproportionate burdens on the poor. Commentators who propose mitigating this impact with tax rebates for low-income families have overlooked the importance of the timing of consumption for these households, as well as the difficulties of “smoothing” income from one time period to another. We survey a wide array of evidence suggesting that poor households lack affordable mechanisms for both borrowing and saving, such that a lump-sum rebate, or even monthly rebates, would not leave the household as well off as they were in the absence of any tax. In addition, we show that the cognitive features of a rebate will be problematic for short-sighted households - those who heavily favor the present over the future. For example, they may impatiently spend rebates too quickly, leaving little money for later necessities, and potentially increasing overall carbon usage. And they likely will procrastinate both learning how to overcome these problems, as well as putting off investing in less carbon-intensive goods.

We do not, however, argue against carbon pricing. Instead, we offer new methods of structuring taxes and rebates to overcome these problems. For instance, we suggest that rebates be offered on a “self-directed” debit card, subject to a sticky default cap on weekly withdrawals. This implement “nudges” short-sighted households away from impatience, while offering affordable credit and modern banking to all. These same mechanisms can be used for other forms of transactional consumption taxes, such as state sales taxes or a possible national value-added tax.

Number of Pages in PDF File: 69

Keywords: carbon tax, cap and trade, consumption tax, sales tax, distributional neutrality, liquidity constraint, lifetime equity, procrastination, hyperbolic discounting, hidden taxes

JEL Classification: D91, H29, K34

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Date posted: April 1, 2010 ; Last revised: June 18, 2011

Suggested Citation

Galle, Brian D. and Utset, Manuel A., Is Cap and Trade Fair to the Poor? Short-Sighted Households and the Timing of Consumption Taxes (March 25, 2010). George Washington Law Review, Vol. 79, p. 33, 2010-2011; FSU College of Law, Public Law Research Paper No. 444; FSU College of Law, Law, Business & Economics Paper No. 10-4; Boston College Law School Legal Studies Research Paper No. 208. Available at SSRN: http://ssrn.com/abstract=1576263

Contact Information

Brian D. Galle (Contact Author)
Boston College Law School ( email )
885 Centre Street
Newton, MA 02459-1163
United States
Manuel A. Utset
Florida State University College of Law ( email )
425 W. Jefferson Street
Tallahassee, FL 32306
United States
(850) 644-7274 (Phone)
HOME PAGE: http://www.law.fsu.edu/faculty/mutset.html
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