Working Paper

Understanding the Inequality and Welfare Impacts of Carbon Tax Policies

Abstract: This paper develops a general equilibrium lifecycle model to explore the welfare and inequality implications of different ways to return carbon tax revenue back to households. We find that the welfare maximizing rebate uses two thirds of carbon-tax revenue to reduce the distortionary tax on capital income while using the remaining one third to increase the progressivity of the labor-income tax. This recycling approach attains higher welfare and more equality than the lump-sum rebate approach preferred by policymakers as well as the approach originally prescribed by economists __ which called exclusively for reductions in distortionary taxes.

Keywords: Carbon tax; inequality; overlapping generations; Revenue recycling;

JEL Classification: Q58; E62; H21; H23;

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Bibliographic Information

Provider: Federal Reserve Bank of San Francisco

Part of Series: Working Paper Series

Publication Date: 2024-05-02

Number: 2024-17

Note: This paper was previously circulated under the title “Recycling Carbon Tax Revenue to Maximize Welfare.

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