A DISTRIBUTIONAL ANALYSIS OF AN ENVIRONMENTAL TAX SHIFT: Distributional Impact of a Green Tax Reform 6

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The largest shift in terms of tax collections occurs in the top decile which faces a higher tax burden equal to nearly 6 percent of the revenues collected from the new taxes.

The lifetime income approach eliminates the regressivity at the lower end of the income distribution. Now, the lowest 70 percent of the income distribution face lower taxes with the additional burden falling on the top three deciles and predominantly on the top 10 percent of the distribution. A similar result holds if we use annual income to rank households but focus on the married 40 to 50 year old cohort. Taxes fall for the bottom 40 percent of the distribution with the largest decreases in the 10th to 20th percentiles.
Taxes also fall for the households in the 50th to 70th percentiles. The fifth decile faces a small increase in taxes. Again, the largest increase occurs in the top decile of the distribution. Measured either by the lifetime or cohort income approach, the tax looks slightly more progressive with a change in the Suits Index now between .084 and Summing up, all of the reforms that I have considered can essentially be viewed as both revenue and distributionally neutral. Given the modest amount of revenue changes resulting from the reform, we should not expect large shifts in the income distribution. Despite the rather regressive nature of the taxes that make up the new environmental tax revenues (as measured by the Suits Index in Table 7), I have shown in this section that it is possible to choose ways to reduce income tax collections in a progressive fashion to offset the regressivity of the environmental taxes. And, as demonstrated in Table 9, it would not be difficult to structure the tax reform to add progressivity to the tax system. An important question is the degree of tax shifting that occurs under any of these reforms relative to the tax shifting that would occur under alternative reforms. To address this issue, I next contrast the green tax shift to a shift from income to consumption taxation, a reform that has been discussed and debated at some length in the past few years.