Working Paper: NBER ID: w25181
Authors: Lawrence H. Goulder; Marc A. C. Hafstead; Gyurim Kim; Xianling Long
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.
Keywords: carbon tax; household income; equity-efficiency tradeoffs; general equilibrium model
JEL Codes: D58; H23; Q52; Q54
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| carbon taxes (H23) | source-side impacts (F69) |
| carbon taxes (H23) | use-side impacts (F69) |
| source-side impacts (F69) | overall welfare effects (D69) |
| use-side impacts (F69) | overall welfare effects (D69) |
| source-side impacts are progressive (F69) | lower-income households benefit (H53) |
| use-side impacts are regressive (F69) | lower-income households experience greater reduction in real income (H31) |
| revenue recycling methods (H27) | efficiency costs (D61) |
| targeted revenue recycling (H23) | mitigates adverse effects on lower-income households (H31) |
| carbon taxes (H23) | overall impact can be made progressive (F69) |