Thursday, February 14, 2013
This paper examines the pros and cons of using a carbon tax to help finance corporate tax reform. Revenues from a plausible carbon tax would be large relative to corporate tax revenues and could thus help finance lower corporate tax rates, extension of business tax preferences, or other corporate tax reforms. Done well, such a tax swap could reduce the environmental risks of carbon emissions and improve the efficiency of America’s corporate tax system. But a carbon-for-corporate tax swap poses a significant distributional challenge. A carbon tax would fall disproportionately on low-income families, while a reduction in corporate taxes would disproportionately benefit those with high incomes. Policymakers can offset some of those impacts through other policy measures, such as paying lump-sum tax rebates. But doing so would reduce the swap’s efficiency benefits. Policymakers may also want to use some carbon revenues for deficit reduction. One option would be to aim for revenue neutrality over an initial period, after which a widening spread between growing carbon revenues and relatively stable corporate tax cuts would reduce the deficit.