Impacts of a Carbon Tax Across Us Household Income Groups: What are the Equity-Efficiency Trade-Offs?

57 Pages Posted: 22 Oct 2018 Last revised: 21 Apr 2024

See all articles by Lawrence H. Goulder

Lawrence H. Goulder

Stanford University - Department of Economics; National Bureau of Economic Research (NBER); Resources for the Future

Marc Hafstead

Resources for the Future

GyuRim Kim

University of California, Los Angeles (UCLA)

Xianling Long

Stanford University

Date Written: October 2018

Abstract

This paper assesses the impacts across US household income groups of carbon taxes of various designs. We consider both the source-side impacts (reflecting how policies affect nominal wage, capital, and transfer incomes) and the use-side impacts (reflecting how policies alter prices of goods and services purchased by households). We apply an integrated general equilibrium framework with extended measures of the source- and use-side impacts that add up to the overall welfare impact. The distributional impacts depend importantly on the revenue recycling method and treatment of transfer income. In the absence of compensation targeted to particular income groups, use-side impacts tend to be regressive and source-side impacts progressive, with the progressive source-side impacts fully offsetting the regressive use-side impacts. Both types of impact are considerably larger under our more comprehensive welfare measures than under more conventional measures. The efficiency costs of targeted compensation to achieve distributional objectives depend critically on the recycling method and compensation target. These costs are an order of magnitude higher when the revenues that remain after compensation are used for corporate income tax cuts than when the remaining revenues are used in other ways. Efficiency costs rise dramatically when targeted compensation extends beyond the lowest income quintiles.

Suggested Citation

Goulder, Lawrence H. and Hafstead, Marc and Kim, GyuRim and Long, Xianling, Impacts of a Carbon Tax Across Us Household Income Groups: What are the Equity-Efficiency Trade-Offs? (October 2018). NBER Working Paper No. w25181, Available at SSRN: https://ssrn.com/abstract=3270761

Lawrence H. Goulder (Contact Author)

Stanford University - Department of Economics ( email )

Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States
650-723-3706 (Phone)
650-725-5702 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Resources for the Future

1616 P Street, NW
Washington, DC 20036
United States

Marc Hafstead

Resources for the Future ( email )

1616 P Street, NW
Washington, DC 20036
United States

GyuRim Kim

University of California, Los Angeles (UCLA) ( email )

405 Hilgard Avenue
Box 951361
Los Angeles, CA 90095
United States

Xianling Long

Stanford University ( email )

Stanford, CA 94305
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
60
Abstract Views
459
Rank
727,893
PlumX Metrics