The Initial Incidence of a Carbon Tax Across Income Groups
Resources for the Future Discussion Paper No. 14-24
24 Pages Posted: 15 Dec 2014
Date Written: August 15, 2014
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.
Keywords: carbon tax, distribution, incidence, tax swap, income quintiles, climate change
JEL Classification: H22, H23, Q52
Suggested Citation: Suggested Citation