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.

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
1 569 335 234 3.01 0.9% 695 645 51 0.23 0.2% 1,248 1,214 34 0.18 0.1%
2 681 533 148 1.29 1.2% 830 913 -83 -0.31 -0.7% 1,406 1,580 -174 -0.61 -0.9%
3 923 801 122 0.74 1.0% 917 1,056 -139 -0.44 -1.1% 1,382 1,681 -299 -0.72 -1.5%
4 1,048 975 73 0.32 0.6% 1,062 1,111 -48 -0.13 -0.4% 1,513 1,761 -248 -0.47 -1.3%
5 1,157 1,143 14 0.07 0.1% 1,199 1,282 -83 -0.20 -0.7% 1,861 1,903 -42 -0.05 -0.2%
6 1,131 1,375 -244 -0.62 -2.0% 1,266 1,297 -31 -0.06 -0.3% 1,706 2,097 -391 -0.57 -2.0%
7 1,410 1,457 -48 -0.10 -0.4% 1,272 1,384 -112 -0.21 -0.9% 1,761 2,163 -402 -0.51 -2.0%
8 1,485 1,591 -105 -0.17 -0.8% 1,440 1,502 -62 -0.11 -0.5% 1,972 2,133 -161 -0.17 -0.8%
9 1,712 1,924 -212 -0.27 -1.7% 1,659 1,571 88 0.13 0.7% 1,998 2,107 -110 -0.08 -0.6%
10 2,260 2,197 62 0.08 0.5% 2,095 1,688 408 0.44 3.3% 2,830 2,954 -124 -0.04 -0.6%
)Suits )Suits ДSuits
Suits -0.248 -0.207 -0.041 -0.056 -0.092 0.036 -0.224 -0.234 0.010

The Suits Index provides a summary measure of income redistribution. The Suits Index is a tax-based analogue to the Gini Coefficient. It ranges from -1 to 1 with negative values indicating a regressive tax and positive values a progressive tax. Figure 2 illustrates how the Suits Index is calculated. The horizontal axis indicates the cumulative distribution of income (ranging from zero to one). The vertical axis indicates the cumulative distribution of taxes (again, ranging from zero to 1). We can then graph the cumulative tax collections from different portions of the income distribution in this graph. Such a graph is called a Tax Concentration Curve and I have drawn three possible curves. Consider first the curve in the lower right triangle of the box. This tax concentration curve represents a progressive tax system. To read it, consider the point (0.50, 0.15) that I have marked on this curve. This point indicates that the bottom 50 percent of the income distribution pays 15 percent of all taxes. Whenever a tax concentration curve lies entirely below the main diagonal of the box, the tax system is unambiguously progressive. The Suits Index is given by the ratio of the area B (area between the tax concentration curve and the main diagonal) and the area A + B (the lower right triangle of the box).td