Working Paper: NBER ID: w15935
Authors: Don Fullerton; Holly Monti
Abstract: Pollution taxes are believed to burden low-income households that spend a greater than average share of income on pollution-intensive goods. Some propose to offset that effect by returning revenue to low-income workers via reduced labor tax. We build analytical general equilibrium models with both skilled and unskilled labor, and we solve for expressions that show the change in the real net wage of each group. A decomposition shows the effect of the tax rebate, the effect on the uses side of income (higher product prices), and the effect on the sources side of income (relative wage rates). We also include numerical examples. Even though the pollution tax injures both types of labor, we find that returning all of the revenue to the low-skilled workers is still not enough to offset the effect of higher product prices. Moreover, changing wage rates may further hurt low-skilled labor. In almost all of our examples, the rebate of all revenue to low-skilled labor still does not prevent a reduction in their overall real net wage.
Keywords: No keywords provided
JEL Codes: H22; H23; Q52; Q58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| pollution taxes (H23) | increase in prices of pollution-intensive goods (Q52) |
| increase in prices of pollution-intensive goods (Q52) | decrease in real net wage of low-skilled workers (F66) |
| pollution taxes (H23) | decrease in real net wage of low-skilled workers (F66) |
| changes in relative wage rates (J39) | exacerbate burden on low-skilled labor (F66) |
| demand for skilled labor (J24) | increase relative to unskilled labor due to pollution tax (F66) |
| low-skilled labor (F66) | less effective substitute for pollution than skilled labor (J24) |
| tax rebate (H20) | insufficient to offset increased costs of pollution-intensive goods (F64) |