Impacts of a Carbon Tax across US Household Income Groups: What Are the Equity-Efficiency Trade-Offs? / Lawrence H. Goulder, Marc A. C. Hafstead, GyuRim Kim, Xianling Long.

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Goulder, Lawrence H

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TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w25181.Publication details: Cambridge, Mass. National Bureau of Economic Research 2018.Description: 1 online resource: illustrations (black and white)Subject(s):

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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.

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Previous	nber w25179 Production and Learning in Teams /	nber w2518 Rules Versus Discretion in Monetary Policy /	nber w25180 Negative Interest Rate Policy and the Yield Curve /	nber w25181 Impacts of a Carbon Tax across US Household Income Groups: What Are the Equity-Efficiency Trade-Offs? /	nber w25182 Minimum Wage Increases and Individual Employment Trajectories /	nber w25183 Firm Scope and Spillovers from New Product Innovation: Evidence from Medical Devices /	nber w25184 Large Banks and Small Firm Lending /	Next

October 2018.

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.