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8 - Carbon Taxes: Macroeconomic and Distributional Effects

from Part IV - The Effects of Fiscal Policy on Growth

Published online by Cambridge University Press:  21 October 2021

John W. Diamond
Rice University, Houston
George R. Zodrow
Rice University, Houston
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Although the Tax Cut and Jobs Act (TCJA) did not include any environmental tax provisions, numerous tax policy discussions in the United States have considered implementing a carbon tax, giving rise to concerns about such a tax‘s potential negative effects on economic growth and the distribution of income in the US economy. This chapter examines the macroeconomic and distributional effects of implementing a representative carbon tax under several assumptions about recycling resulting tax revenues. It simulates these effects using the Diamond-Zodrow (DZ) dynamic overlapping generations computable general equilibrium (CGE) model. Earlier literature and our results confirm that: (i) the negative effects of a carbon tax are moderate on the level of future GDP and negligible on the rate of economic growth; and (ii) the regressive effects of a carbon tax can easily be offset with judicious use of the resulting revenues. Policies that use carbon tax revenues to finance uniform per-household rebates and to enact policies favorable to capital formation, such as elimination of both personal taxes on dividends and capital gains, and national debt, can have a highly progressive net impact.

Publisher: Cambridge University Press
Print publication year: 2021

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