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The Impact of a Carbon Tax on Inequality in the United States

The Question: Does a carbon tax necessarily exacerbate existing inequality?

The Point: Climate change and economic inequality are inextricably linked. Without substantial action to reduce greenhouse gas emissions, research finds that climate change will disproportionately harm the poor both within the United States and around the world. Meanwhile, policies to curb greenhouse gas emissions and address climate change can amplify existing inequalities. Despite widespread agreement among economists that a carbon tax is the most efficient mechanism to curb greenhouse gas emissions, such a tax exacerbates inequality since low-income households spend a greater share of their income on carbon-intensive goods. Thus, policymakers cannot confront climate change without also confronting economic inequality.

Data and Findings: Using Input-Output tables and detailed data on household consumption patters (Consumer Expenditure Survey) for the United States, we calculate the carbon intensity of goods to estimate households’ carbon footprints and examine how a tax of $50 per ton of CO2 impacts multiple forms of inequality. Devoting carbon tax revenue to provide all people with an equal carbon dividend makes the policy progress, minimizes redistribution among households of similar means, mitigates group-based inequalities, and increases welfare for 55 percent of individuals, including 84 percent in the bottom half of the distribution. While some economists have dismissed dividends on efficiency grounds, we show that macroeconomic benefits of tax cuts are insufficient to protect the purchasing power of a majority of Americans.

You can find the full paper here.

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