A DISTRIBUTIONAL ANALYSIS OF AN ENVIRONMENTAL TAX SHIFT: Distributional Impact of a Green Tax Reform 5

The degree of progressivity rises considerably under either of the two measures designed to account for lifecycle considerations. The lifetime income approach indicates that the 5th to 10th percentile households face very small tax increases (.2 percent of income) while households in the 10th to 80th percentiles face tax cuts up to .4 percent of income. The top 20 percent of the distribution face tax increases with the top decile facing an increase of .4 percent. A similar result holds for the married, middle-aged cohort except now the lowest income group receives a tax cut rather than a tax increase. The tax cuts range from a low of .01 percent to a high of 1.01 percent. The top decile has a modest tax increase of .18 percent and the change in the Suits Index is now .057. In summary, Table 8 demonstrates that it is possible to construct an environmental tax that is essentially distributionally neutral despite the regressivity of the various environmental levies.

Annual Income Lifetime Income Married, Age 40-50
Decile Increase Decrease Д Tax ДAverage Tax Rate TaxShift Increase Decrease Д Tax AAverage Tax Rate TaxShift Increase Decrease Д Tax ДAverage Tax Rate TaxShift
1 569 526 43 0.64 0.2% 695 738 -43 -0.19 -0.2% 1,248 1,448 -200 -1.13 -0.6%
2 681 758 -77 -0.64 -0.6% 830 1,020 -190 -0.70 -1.5% 1,406 1,945 -539 -1.87 -3.1%
3 923 1,083 -160 -0.87 -1.3% 917 1,152 -235 -0.74 -1.9% 1,382 1,739 -357 -0.88 -2.1%
4 1,048 1,187 -139 -0.53 -1.1% 1,062 1,108 -46 -0.12 -0.4% 1,513 1,588 -75 -0.14 -0.4%
5 1,157 1,283 -126 -0.37 -1.0% 1,199 1,280 -81 -0.19 -0.7% 1,861 1,790 71 0.15 0.4%
6 1,131 1,373 -242 -0.61 -1.9% 1,266 1,345 -79 -0.16 -0.6% 1,706 1,900 -194 -0.28 -1.1%
7 1,410 1,423 -13 -0.03 -0.1% 1,272 1,426 -154 -0.28 -1.3% 1,761 1,866 -105 -0.13 -0.6%
8 1,485 1,468 17 0.03 0.1% 1,440 1,428 12 0.02 0.1% 1,972 1,735 237 0.26 1.4%
9 1,712 1,673 39 0.05 0.3% 1,659 1,460 199 0.29 1.6% 1,998 1,651 347 0.31 2.0%
10 2,260 1,541 719 0.49 5.8% 2,095 1,482 613 0.67 5.0% 2,830 1,806 1,024 0.50 6.0%
ДSuits ДSuits ASuits
Suits -0.248 -0.323 0.075 -0.056 -0.140 0.084 -0.224 -0.342 0.118

Next, I consider a reform that increases the progressivity of the tax system. The environmental taxes are the same but the use of the proceeds differs. Rather than give each worker a $5,000 wage exemption from payroll taxes, I tie the size of the exemption to family size. In particular, I provide each worker an exemption equal to the poverty level for a family of their size divided by the size of number of workers. This costs $55.1 billion and allows an increase in the refundable tax credit from $150 per exemption to $300.22 Table 9 presents results from this scenario.

Ranking households by annual income, the tax looks mildly progressive except in the lowest income group. Households in the income 10th through 70th percentiles face lower taxes while the top three deciles face tax increases. Note, though, that the greatest tax increase (as measured by change in average tax rate) falls on the households in the lowest income group. As measured by the change in Suits Index, the tax reform adds some progressivity to the system.-126/span/span