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Tax Reform and Environmental Policy: Options for Recycling Revenue from a Tax on Carbon Dioxide

  • Goulder, Lawrence H.


  • Hafstead, Marc A.C.


    (Resources for the Future)

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    Carbon taxes are a potential revenue source that could play a key role in major tax reform. This paper employs a numerical general equilibrium model of the United States to evaluate alternative tax reductions that could be financed by the revenues from a carbon tax. We consider a carbon tax that begins at $10 per ton in 2013 and increases at 5 percent per year to the year 2040. The net revenue from the tax is substantial, and the GDP and welfare impacts of the tax depend significantly on how this revenue is recycled to the private sector. Under our central case simulations (which do not account for beneficial environmental impacts) over the period 2013–2040, the tax reduces GDP by .56 percent when revenues are returned through lump-sum rebates to households, as compared with .33 and .24 percent when the revenues are recycled through reductions in personal and corporate tax rates, respectively. Introducing tradable exemptions to the carbon tax reduces or eliminates the negative impacts on the profits of the most vulnerable carbon-supplying or carbon-using industries. The GDP and welfare impacts are somewhat larger when such exemptions are introduced.

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    Paper provided by Resources For the Future in its series Discussion Papers with number dp-13-31.

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    Date of creation: 08 Oct 2013
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    Handle: RePEc:rff:dpaper:dp-13-31
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    1. 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(1), pages 67-140.
    2. Robert E. Hall, 1981. "Intertemporal Substitution in Consumption," NBER Working Papers 0720, National Bureau of Economic Research, Inc.
    3. 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.
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