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Carbon Tax and Revenue Recycling: Revenue, Economic, and Distributional Implications

November 6, 2019

Tax Foundation Report Models a Tax on Carbon Dioxide with Revenue Redistributed through Tax Cuts or Rebates

Our estimates show that a carbon tax levied on all energy-related carbon emissions at a rate of $50 per metric ton and an annual growth rate of 5 percent would generate $1.87 trillion in additional federal revenue over the next 10 years. In isolation and ignoring environmental effects, a carbon tax negatively impacts output and employment and makes the tax code less progressive. Distributional and economic effects of a carbon tax critically depend on how the generated tax revenue is used, making revenue recycling an essential element of any carbon tax proposal.

A carbon tax paired with a lump-sum rebate would increase the tax code’s progressivity significantly, but impact employment and output negatively.

A carbon tax paired with a cut in the employee-side payroll tax increases progressivity, output, and employment.

A carbon tax paired with a cut in the corporate income tax, permanent 100 percent bonus depreciation, and R&D expensing boosts output and pretax wages while decreasing progressivity and lowering employment.

Kyle Pomerleau