December 14, 2017

TAX WHAT YOU DON'T WANT:

Fill the gaps in the tax bill with a carbon tax and expanded benefits for working families (Aparna Mathur and Adele MorrisFriday, December 8, 2017, bROOKINGS)

A carbon tax is shorthand for a tax on emissions of carbon dioxide (or, in the case of fossil fuels, their carbon content before combustion) and other greenhouse gases. Such a tax is appealing because it serves the dual purpose of benefitting the environment and generating significant revenue to use to achieve other goals. According to a 2016 analysis by the Congressional Budget Office, a greenhouse gas tax could yield $977 billion in revenue over a 10-year period, nearly equal to the JCT deficit estimate. Our own work with colleagues estimates that a carbon tax starting at about $25 per metric ton of CO2, rising at 5 percent per year over inflation, would gross over $110 billion the first year and over $1 trillion over 10 years while reducing U.S. CO2 emissions by over 50 percent by 2040 relative to a business-as-usual emissions projection. The policy would also reduce harmful air pollutants like sulphur dioxide, mercury, particulate matter, and nitrogen oxides.

One concern with the carbon tax is that it is regressive, meaning lower income households bear a larger burden of the tax as a fraction of their income than higher income households do. However, good policy design can offset this regressivity. In a recent paper, we model how the revenues from a carbon tax could be used in part to fund an expansion of the EITC, thus using a regressive tax to fund a progressive benefit. The EITC program has bipartisan support, is well-targeted to low- and moderate-income households, and is shown to strengthen work incentives. The EITC is a powerful anti-poverty tool, credited with reducing the number of people in poverty by 16 percent, and the number of children in poverty by 30 percent.

Posted by at December 14, 2017 6:52 PM

  

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