Vertical and Horizontal Redistributions from a Carbon Tax and Rebate

44 Pages Posted: 20 Mar 2017

See all articles by Julie Anne Cronin

Julie Anne Cronin

Government of the United States of America - Department of the Treasury

Don Fullerton

University of Illinois at Urbana-Champaign - Department of Finance; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute)

Steven Sexton

Duke University Sanford School of Public Policy

Multiple version iconThere are 2 versions of this paper

Date Written: March 2017

Abstract

Because electricity is a higher fraction of spending for those with low income, carbon taxes are believed to be regressive. Many argue, however, that their revenues can be used to offset the regressivity. We assess these claims by employing data on 322,000 families in the U.S. Treasury’s Distribution Model to study vertical redistributions between rich and poor, as well as horizontal redistributions among families with common incomes but heterogeneous energy intensity of consumption (different home heating and cooling demands). Accounting for the statutory indexing of transfers, and measuring impacts on annual consumption as a proxy for permanent income, we find that the carbon tax burden is progressive, rising across deciles as a fraction of consumption. The rebate of revenue via transfers makes it even more progressive. In every decile, the standard deviation of the change in consumption as a fraction of consumption varies around 1% or 2% and is larger than the average burden (about 0.7%). When existing transfer programs are used to rebate revenue, the tax and rebate together increase that variation to more than 3% within each decile. The average family in the poorest decile gets a net tax cut of about 1% of consumption, but 44% of them get a net tax increase. Relative to no rebate, every type of rebate we consider increases this variation within most deciles.

Suggested Citation

Cronin, Julie Anne and Fullerton, Don and Sexton, Steven, Vertical and Horizontal Redistributions from a Carbon Tax and Rebate (March 2017). NBER Working Paper No. w23250. Available at SSRN: https://ssrn.com/abstract=2937520

Julie Anne Cronin (Contact Author)

Government of the United States of America - Department of the Treasury ( email )

1500 Pennsylvania Avenue, NW
Washington, DC 20220
United States

Don Fullerton

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
(217) 244-3621 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Steven Sexton

Duke University Sanford School of Public Policy ( email )

201 Science Drive
Box 90312
Durham, NC 27708-0239
United States

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