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.

Table 1. Federal Revenues: 1994

Source Amount


Income Taxes 683
Social Insurance Taxes 461
Excise Taxes 55
Estate & Gift Taxes 15
Other 44
Total 1,258
Source: Statistical Abstract of the United States, 1996.

A carbon tax is a tax on the carbon content of fossil fuels. As such it differs across fuel types. Coal contains the most carbon per BTU (.025 tons of carbon per billion BTUs) followed closely by oil (.020 tons per billion BTUs). Natural gas contains .015 tons per billion BTUs (Poterba, Table 3.3, 1991). The main attraction of a carbon tax is that it discourages carbon emissions on two fronts. First, the increase in overall energy prices encourages energy conservation and investment in energy efficiency leading to a reduction in energy consumption overall. Second, the tax encourages the substitution of low carbon for high carbon fuels. Specifically, it would encourage the use of hydropower, nuclear energy, and renewable energies (solar and wind).

Table 3. Environmental Taxes

Tax Revenue (billions)
Carbon Tax $56.0
Gasoline Tax $19.8
Air Pollution Taxes $40.5
Virgin Materials Tax $9.3
Total $125.6

In 1994, 1,399 million metric tons of carbon (MtC) were emitted in the United States (Annual Energy Review, 1996). Under the assumption that carbon emissions are inelastically supplied in the short run, a $40 per ton tax would raise $56 billion. A carbon tax at this level would be roughly the optimal tax if marginal environmental damages from carbon emissions were between $50 to $75 per ton (Bovenberg and Goulder (1996)).