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Do the Costs of a Carbon Tax Vanish When Interactions With Other Taxes are Accounted For?

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Lawrence H. Goulder
Abstract

Previous analyses of U.S. carbon taxes have tended to ignore interactions between this tax and other, pre-existing U.S. taxes. This paper assesses the effects of the carbon tax using a model that addresses these interactions. The model is unique in integrating a detailed treatment of taxes and attention to nonrenewable resource supply dynamics within a disaggregated general equilibrium framework. We find that the GNP and welfare costs of the carbon tax are significantly lower than what would be predicted if tax interactions were disregarded. When the revenues are used to finance reductions in marginal taxes at the personal or corporate level, the welfare costs are 25-32 percent lower than when the revenues finance lump-sum reductions in taxes. Pre-existing distortions -- specifically, the relatively light taxation of fossil-fuel-producing industries in comparison with other industries -- imply that the gross efficiency costs of carbon taxes are about 15 percent lower than would be the case if fossil-fuel-producing industries were not initially tax-favored.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4061.

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Date of creation: May 1992
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Handle: RePEc:nbr:nberwo:4061

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Lawrance, Emily C, 1991. "Poverty and the Rate of Time Preference: Evidence from Panel Data," Journal of Political Economy, University of Chicago Press, vol. 99(1), pages 54-77, February. [Downloadable!] (restricted)
  2. Dale W. Jorgenson & Peter J. Wilcoxen, 1990. "Environmental Regulation and U.S. Economic Growth," RAND Journal of Economics, The RAND Corporation, vol. 21(2), pages 314-340, Summer. [Downloadable!] (restricted)
  3. Mussa, Michael, 1978. "Dynamic Adjustment in the Heckscher-Ohlin-Samuelson Model," Journal of Political Economy, University of Chicago Press, vol. 86(5), pages 775-91, October. [Downloadable!] (restricted)
  4. Lawrence H. Summers, 1981. "Taxation and Corporate Investment: A q-Theory Approach," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1981-1), pages 67-140. [Downloadable!]
  5. Jean-Marc Burniaux & John P. Martin & Giuseppe Nicoletti & Joaquim Oliveira Martins, 1991. "GREEN - - A Multi-Region Dynamic General Equilibrium Model for Quantifying the Costs of Curbing CO2 Emissions: A Technical Manual," OECD Economics Department Working Papers 104, OECD Economics Department. [Downloadable!]
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  1. Robert Ayres, 1994. "On economic disequilibrium and free lunch," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 4(5), pages 435-454, October. [Downloadable!] (restricted)
  2. John Pezzey & Andrew Park, 1998. "Reflections on the Double Dividend Debate," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 11(3), pages 539-555, April. [Downloadable!] (restricted)
  3. Robert Ayres, 1995. "Thermodynamics and process analysis for future economic scenarios," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 6(3), pages 207-230, October. [Downloadable!] (restricted)
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