A DISTRIBUTIONAL ANALYSIS OF AN ENVIRONMENTAL TAX SHIFT: Distributional Impact of a Green Tax Reform 4

Table 7 reports Suits Indices on components of the tax reform. Among the new environmental taxes, the carbon tax is most regressive and the virgin materials tax is least regressive. The differences among the various environmental taxes in terms of regressivity are not large however. That fact suggests that adjusting the components of the environmental revenue package will not affect the distribution very much. On the other hand, the differences in degree of regressivity are quite large for the components of the tax reduction. Since these are rate reductions, a negative sign on the Suits Index indicates the system becomes more progressive as this tax is reduced while a positive sign indicates an increase in regressivity. The refundable tax credits add the most progressivity to the system (as measured by the Suits Index) while proportional rate reductions add the least progressivity. In fact, rate reductions diminish the progressivity of the tax system.
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A DISTRIBUTIONAL ANALYSIS OF AN ENVIRONMENTAL TAX SHIFT: Distributional Impact of a Green Tax Reform 3

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The second set of columns uses the measure of annualized lifetime income that I have proposed in Caspersen and Metcalf (1994). Ranking households by this measure of income makes the tax reform look slightly more progressive. The lowest income group and the highest two income groups see their taxes go up modestly while the groups in the 10th to 80th percentiles face lower taxes. Measured as a percentage of income, no group sees a change in tax liability as large as ‘/2 of one percent. The difference in Suits Indices is now positive, albeit close to zero, indicating a slight increase in progressivity with this reform. The tax shift variable shows that the top decile receives over 3 percent of the new tax revenues and that the lowest decile along with the top two deciles receive over 4 percent of revenues. Again, the degree of across decile tax shifting is not very large with this reform.

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A DISTRIBUTIONAL ANALYSIS OF AN ENVIRONMENTAL TAX SHIFT: Distributional Impact of a Green Tax Reform 2

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The diagonal line running from the lower left corner of the box to the upper right corner indicates a tax concentration curve for a proportional tax system. The bottom 50 percent (20 percent) of the population would pay 50 percent (20 percent) of the taxes. The Suits Index in this case would be zero. Finally, the dashed line above the main diagonal is a tax concentration curve for a regressive tax. The bottom half of the income distribution pays more than half of the taxes. In this case the Suits Index would be negative.

I constructed Suits Indices for the incremental taxes (both positive and negative) that follow the reform. The Suits Index for the environmental taxes is -0.248 indicating that this new tax levied in isolation would be a regressive tax. We are reducing a tax, however, in a progressive fashion. If we had levied an incremental tax equal in magnitude to the tax that we are eliminating (the “decrease” column in Table 6), that tax would also have been regressive (as measured by a Suits Index of -0.207). Note, however, that the regressivity of the income tax component that we propose to eliminate is smaller than the regressivity of the new tax (as measured by Suits Indices). Thus the shift is regressive (as measured by the difference in Suits Indices). The degree of regressivity is fairly small, however, as the difference in Suits Indices is near 0.
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A DISTRIBUTIONAL ANALYSIS OF AN ENVIRONMENTAL TAX SHIFT: Distributional Impact of a Green Tax Reform

Table 6 provides incidence results for households in the Consumer Expenditure Survey. As discussed above, I provide results using three different measures of income and group households into ten income groups with decile 1 representing households in the lowest 10 percent of the income distribution and decile 10 representing households in the top 10 percent of the income distribution. Using annual income to rank households, I find that this scenario reduces the progressivity of the tax system slightly with an increase in taxes paid by the bottom half of the distribution and tax cuts for most of the top half. The top decile faces a very small increase in taxation. In percentage terms, the increase in taxes is substantial for the bottom 20 percent of the income distribution: the income group in the 5th to 10th percentiles see their taxes go up on average 3 percent of their income while the group from 10th to 20th percentiles face an increase of over 1 percent of income. Given the small size of the redistribution ($125.6 billion), no single group faces a large tax increase. If the hope is to design a progressive tax shift, however, this proposal falls short on the basis of annual income measures.

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A DISTRIBUTIONAL ANALYSIS OF AN ENVIRONMENTAL TAX SHIFT: Data 5

The reason that electricity prices do not rise as much as do natural gas prices is that while 79 percent of the share of industry goods used by the natural gas industry are subject either directly or indirectly to the carbon tax, only 37 percent of the share of industry goods used by the electricity industry is subject to the tax. Other important industrial inputs into the electricity industry include construction (22 percent) and services (12 percent).
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A DISTRIBUTIONAL ANALYSIS OF AN ENVIRONMENTAL TAX SHIFT: Data 4

A similar approach is used for the other pollutants. Because a significant amount of NOX, VOC and PM-10 emissions are due to motor vehicles, I also include a $35 per new vehicle tax to proxy for a tax on motor vehicle emissions. In total, these air pollution taxes would raise $40.5 billion.
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A DISTRIBUTIONAL ANALYSIS OF AN ENVIRONMENTAL TAX SHIFT: Data 3

The carbon tax is allocated to petroleum products (42 percent) , natural gas (22 percent), and coal (35 percent) on the basis of aggregate carbon dioxide emissions in 1995. Based on this breakdown, I allocate $24 billion of carbon tax to petroleum, $12 billion to natural gas, and $20 billion to coal. The tax on coal is allocated to the coal mining industry while I allocate the tax on natural gas to the output of the crude oil and natural gas industry used by electric and gas utilities.

In addition to a carbon tax, I model a motor fuels excise tax. This is a tax on gasoline and diesel fuel sales. Currently, federal excise taxes on motor fuels are 18.30 per gallon of gasoline and 24.30 per gallon of diesel fuel (CBO, 1997). I model an increase in the gasoline tax of 150 per gallon and an increase in the diesel fuel tax (for diesel in highway use) of 9.40 per gallon. Based on fuel consumption in 1994 (and assuming inelastic demand), these taxes would raise an additional $19.8 billion in tax revenue. Gasoline is used directly by consumers and is used by businesses. The former is allocated directly to households while the latter is allocated to the transportation industry in the Input-Output Accounts. Based on gasoline expenditures reported in personal consumption expenditures in NIPA accounts, personal gasoline consumption accounts for 85 percent of total gasoline expenditures. Thus, I allocate 85 percent of the gasoline tax revenues to consumers directly and the remaining 15 percent along with the diesel tax revenue as an additional cost of production (higher transportation costs) and allocate the tax based on industry use of transportation.
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A DISTRIBUTIONAL ANALYSIS OF AN ENVIRONMENTAL TAX SHIFT: Data 2

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Tax Shift Analysis A. A Green Tax Shift Equal to 10 Percent of Federal Revenues

I begin with an analysis of a moderate shift in the income tax base in which I replace 10 percent of federal receipts with a cluster of environmental taxes. Since federal revenues totaled $1,258 billion in 1994 (see Table 1), this scenario requires raising roughly $126 billion in new taxes. I begin with a description of the environmental taxes that I consider followed by a description of the tax reductions that are funded by the environmental levies. The new taxes that I implement are taxes on carbon emissions, gasoline consumption, air pollution, and the use of new (virgin) materials in production.

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A DISTRIBUTIONAL ANALYSIS OF AN ENVIRONMENTAL TAX SHIFT: Data

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The basic data source for this analysis is the 1994 Consumer Expenditure Survey (CES). The CES has detailed household level data on consumption patterns as well as some data on household income, taxes and household demographic characteristics. There are 3 adjustments I must make to the CES data before I can analyze any tax reform. First, the CES reports out of pocket medical expenditures and ignores spending on a consumer’s behalf by HMOs and insurance companies. I use data from the National Medical Expenditure Survey (NMES) to attribute medical spending to individual households to replace the health spending reported in the CES. Second, I make adjustments to the CES income and consumption categories to match aggregate numbers in the National Income and Product Accounts. Third, I attribute corporate tax payments to individual households using a methodology developed by Feldstein (1988). I provide details on these adjustments in Appendix A.
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A DISTRIBUTIONAL ANALYSIS OF AN ENVIRONMENTAL TAX SHIFT: Introduction 8

Another incidence result occurs if these taxes replace current regulations that are designed to mitigate pollution9. Consider, for example, a simple example where pollution (X) is restricted to an amount (X0) by regulatory efforts. Now we replace those regulations with a system of pollution taxes that induces firms to reduce their pollution to X0. To see how this would work, consider Figure 1. The downward sloping line graphs marginal benefits of pollution (MB) to the firm. In the absence of any government intervention, firms would pollute to the point where marginal benefits equal marginal costs. If marginal costs are zero, then firms would pollute up to an amount equal to Xx in the figure.

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