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Impacts of a carbon tax across US household income groups: What are the equity-efficiency trade-offs?

Author

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  • Goulder, Lawrence H.
  • Hafstead, Marc A.C.
  • Kim, GyuRim
  • Long, Xianling

Abstract

This paper assesses the impacts across U.S. household income groups of carbon taxes of various designs. We consider both the source-side impacts (reflecting how policies affect wage, capital, and transfer incomes) as well as the use-side impacts (reflecting how policies alter the 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. Our results indicate that the distributional impacts depend importantly on the nature of revenue-recycling and the treatment of transfer income. In the absence of targeted compensation to achieve distributional objectives, the use-side impacts tend to be regressive while the source-side impacts are progressive, and the progressive source-side impacts tend to offset fully the regressive use-side impacts. Both impacts are considerably larger when one employs the more comprehensive welfare measures introduced in this study. 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 remaining revenues after compensation are used for corporate income tax cuts, compared with costs when remaining revenues are used other ways. Efficiency costs also rise dramatically when targeted compensation extends beyond the lowest income quintiles.

Suggested Citation

  • Goulder, Lawrence H. & Hafstead, Marc A.C. & Kim, GyuRim & Long, Xianling, 2019. "Impacts of a carbon tax across US household income groups: What are the equity-efficiency trade-offs?," Journal of Public Economics, Elsevier, vol. 175(C), pages 44-64.
    • Handle: RePEc:eee:pubeco:v:175:y:2019:i:c:p:44-64
    DOI: 10.1016/j.jpubeco.2019.04.002
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    More about this item

    Keywords

    Carbon tax; Household distributional impacts; General equilibrium; Costs of compensation;
    All these keywords.

    JEL classification:

    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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