Can pollution tax rebates protect low-wage earners?

Don Fullerton, Holly Monti

Research output: Contribution to journalArticle

Abstract

Pollution taxes are believed to burden low-income households that spend a greater than average share of income on pollution-intensive goods. Some proposals offset that effect by returning revenue to low-income workers via reduced labor tax. We build analytical general equilibrium models with both high-skilled and low-skilled labor, and we solve for the change in real net wage of each group. Decomposition shows the separate effects of the tax rebate, higher product prices, and the changes in relative wage rates. We also include numerical examples. Even though the pollution tax injures both types of labor, in most cases we find that returning all of the revenue to low-skilled workers is still not enough to offset higher product prices. Changes in relative wage rates may further hurt low-skilled labor. Protecting low-income workers is possible in this model only if they are defined as those below a relatively low wage threshold, but we discuss many possible elaborations of this model that could affect those results.

Original languageEnglish (US)
Pages (from-to)539-553
Number of pages15
JournalJournal of Environmental Economics and Management
Volume66
Issue number3
DOIs
StatePublished - Nov 1 2013

Keywords

  • Distributional effects
  • Revenue neutral reform
  • Tax incidence

ASJC Scopus subject areas

  • Economics and Econometrics
  • Management, Monitoring, Policy and Law

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