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A Distributional Analysis of an Environmental Tax Shift

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  • Gilbert E. Metcalf
Abstract
I use data from the 1994 Consumer Expenditure Survey as well as other sources to measure the distributional impact of green tax reforms and consumption tax reforms using both annual income and lifetime income approaches to rank households. A modest tax reform in which environmental taxes equal to 10% of federal receipts are collected has a negligible impact on the income distribution when the funds are rebated to households through reductions in the payroll tax and personal income tax. The degree of income shifting can be adjusted with changes in how the revenues are returned to households and it is possible to increase the progressivity of the tax system with an environmental tax reform. I then compare these reforms to a reform that shifts the tax base from income to consumption. In this case, it is difficult to maintain the level of progressivity that exists under the current income tax although ways exist by which the regressivity of the reform could be blunted. Whether the long term growth gains from consumption tax reform would offset the initial increase in regressivity remains to be determined. A shift to greater reliance on environmental taxes would reduce the progressivity of the tax system. This analysis indicates that reforms can be designed to preserve the existing income distribution. In fact, it appears to be easier to maintain distributional neutrality with a Green tax reform than with a comprehensive consumption tax reform.

Suggested Citation

  • Gilbert E. Metcalf, 1998. "A Distributional Analysis of an Environmental Tax Shift," NBER Working Papers 6546, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:6546
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    Cited by:

    1. Walter H. Corson, 2002. "Recognizing hidden environmental and social costs and reducing ecological and societal damage through tax, price, and subsidy reform," Environment Systems and Decisions, Springer, vol. 22(1), pages 67-82, March.
    2. Stanislav Klazar & Barbora Slintáková & Slavomíra Svátková & Martin Zelený, 2007. "Incidence of the VAT Rates Harmonisation in the Czech Republic [Dopad harmonizace sazeb DPH v ČR]," Acta Oeconomica Pragensia, Prague University of Economics and Business, vol. 2007(1), pages 45-56.
    3. Henrik Klinge Jacobsen & Katja Birr-Pedersen & Mette Wier, 2003. "Distributional Implications of Environmental Taxation in Denmark," Fiscal Studies, Institute for Fiscal Studies, vol. 24(4), pages 477-499, December.
    4. Bovenberg, A. Lans & Goulder, Lawrence H., 2000. "Neutralizing the Adverse Industry Impacts of CO2 Abatement Policies: What Does It Cost?," Discussion Papers 10647, Resources for the Future.
    5. Wang, Qian & Hubacek, Klaus & Feng, Kuishuang & Wei, Yi-Ming & Liang, Qiao-Mei, 2016. "Distributional effects of carbon taxation," Applied Energy, Elsevier, vol. 184(C), pages 1123-1131.
    6. Oladosu, Gbadebo & Rose, Adam, 2007. "Income distribution impacts of climate change mitigation policy in the Susquehanna River Basin Economy," Energy Economics, Elsevier, vol. 29(3), pages 520-544, May.
    7. David Yu, 1998. "Two Equivalence Theorems For Government Finance," Discussion Papers Series, Department of Economics, Tufts University 9817, Department of Economics, Tufts University.
    8. Paul O'Brien & Ann Vourc'h, 2002. "Encouraging Environmentally Sustainable Growth: Experience in OECD Countries," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 29(2), pages 93-111, June.
    9. A. Lans Bovenberg & Lawrence H. Goulder, 2001. "Neutralizing the Adverse Industry Impacts of CO2 Abatement Policies: What Does It Cost?," NBER Chapters, in: Behavioral and Distributional Effects of Environmental Policy, pages 45-90, National Bureau of Economic Research, Inc.
    10. David Yu, 1998. "Rational Bubbles Under Diverse Information," Discussion Papers Series, Department of Economics, Tufts University 9816, Department of Economics, Tufts University.
    11. James Boyce, 2003. "Inequality and Environmental Protection," Working Papers wp52, Political Economy Research Institute, University of Massachusetts at Amherst.

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    More about this item

    JEL classification:

    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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