Young Economics.

Carbon taxation and income distribution

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A few days ago at the Forbes web site, Bruce Bartlett posted about carbon pricing.  Bartlett doesn’t seem to be a fan of carbon pricing in principle, but he suggests that a carbon tax is preferable to a cap and trade plan — a suggestion with which I strongly agree.

My purpose in this post is not to discuss carbon pricing at length, but quickly to address a few numbers that Bartlett pulled from testimony delivered by Peter Orszag to the Ways and Means Committee of the US House of Representatives.  Orszag estimated the burden that “a plan similar to that proposed by Obama” would impose upon American consumers, broken down by quintile of the income distribution:

Burden of Obama-like Carbon Pricing Plan, by Income Quintile

I have no idea about the quality of these estimates; it doesn’t matter for my purposes.  The numbers illustrate the regressiveness of carbon pricing, a fact that is often used to attack the concept — even by some on the left, like the federal and BC branches of the New Democratic Party with respect to carbon taxation.  (Conveniently, they neglect to mention that the cap and trade plan has the same effect.)

Anyway, there’s no reason for this post to get long.  All I want to say is the following: Suppose we imposed a carbon tax and put one hundred percent of the revenues into a big pool, and then sent every taxpayer a cheque each quarter equal to the average per-taxpayer amount of carbon tax paid during the previous quarter.  Then, using the numbers from the above table:

Net Benefit of Carbon Transfer, by Income Quintile

Suddenly, the regressiveness is gone!

I’m just sayin’. . . .

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Written by Alex

March 15, 2009 at 8:57 pm

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