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.

Table 7. Suits Indices for Components of Tax Reform

Tax Proposal Increased Tax Decreased Tax
Carbon Tax -0.260
Motor Fuels Tax -0.250
Air Pollution Taxes -0.238
Virgin Materials Tax -0.214
Payroll Tax Reductions -0.230
Refundable Tax Credit -0.358
Rate Reductions 0.129

To measure the sensitivity of the distributional results to changes in the reform proposal, I increased the refundable tax credit from $150 per exemption to $200 per exemption while decreasing the proportional rate reduction to maintain revenue neutrality. The cost of the refundable exemption rises from $34.9 billion to $46.5 billion. The rate reduction on the personal income tax must be lowered to reduce the collections by $11.6 billion and the proportional rate reduction is now 1.7 percent. With this small change, the tax reform now looks progressive (as measured by the Suits Index) regardless of the income measure used or cohort considered (see Table 8). Taking annual income as the appropriate measure of household well-being, the tax is now essentially proportional. Households in the 5th to 10th percentiles face an increase in taxes on average of $171 per year (2.2 percent of their income) while households in the 10th to 30th percentiles face smaller increases. Households in the 30th to 90th percentiles receive tax reductions with the largest reduction going to the 6th decile. The top decile faces the largest tax increase (in absolute terms though the increase is small relative to their income). The tax shift (as a percentage of tax collections from the new tax) is largest for this decile with the increase in their taxes equal to 2.9 percent of the $125 billion collected from the new taxes.

Annual Income Lifetime Income Married, Age 40-50
Decile Increase Decrease Д Tax Д Average Tax Rate TaxShift Increase Decrease Д Tax Д Average Tax Rate TaxShift Increase Decrease Д Tax Д Average Tax Rate TaxShift
1 569 398 171 2.22 0.7% 695 686 9 0.23 0.0% 1,248 1,308 -60 -0.33 -0.2%
2 681 608 73 0.64 0.6% 830 955 -125 -0.31 -1.0% 1,406 1,693 -287 -1.01 -1.5%
3 923 883 40 0.26 0.3% 917 1,086 -169 -0.44 -1.4% 1,382 1,765 -383 -0.93 -2.0%
4 1,048 1,050 -2 -0.02 -0.0% 1,062 1,119 -57 -0.13 -0.5% 1,513 1,788 -275 -0.52 -1.5%
5 1,157 1,192 -35 -0.08 -0.3% 1,199 1,287 -88 -0.20 -0.7% 1,861 1,947 -86 -0.12 -0.5%
6 1,131 1,401 -270 -0.69 -2.2% 1,266 1,306 -40 -0.06 -0.3% 1,706 2,080 -374 -0.54 -2.0%
7 1,410 1,469 -59 -0.12 -0.5% 1,272 1,389 -117 -0.21 -1.0% 1,761 2,127 -366 -0.46 -1.9%
8 1,485 1,565 -80 -0.13 -0.6% 1,440 1,488 -48 -0.11 -0.4% 1,972 2,050 -78 -0.08 -0.4%
9 1,712 1,858 -146 -0.19 -1.2% 1,659 1,541 118 0.13 1.0% 1,998 2,003 -5 -0.01 -0.0%
10 2,260 1,897 363 0.24 2.9% 2,095 1,585 510 0.44 4.2% 2,830 2,423 407 0.18 2.2%
ДSuits ДSuits ДSuits
Suits -0.248 -0.254 0.006 -0.056 -0.092 0.036 -0.224 -0.281 0.057

/span