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Carbon Tax Swap for Corporate Rate Cut Could Boost GDP, Lower Deficit, Study Says

Wednesday, February 13, 2013

Taxing the carbon content of fossil fuels could allow Congress to significantly reduce corporate tax rates that act as a drag on the U.S. economy while also raising new revenue to address the federal budget deficit, according to a study issued Feb. 11 by the Urban Institute and the Brookings Institution.

But imposing a carbon tax--which could raise $1.2 trillion in new revenue over the next decade--would still pose a “significant distributional challenge” because carbon taxes tend to disproportionately hurt lower-income families, the study said. Alternatively, cutting the corporate income tax also would disproportionately benefit high-income earners, according to the study, Carbon Taxes and Corporate Tax Reform.

Options for shielding low-income earners from carbon taxes--which would disproportionately raise their costs for vehicle fuel and energy costs for cooling and heating their homes--include transfer payments such as a lump sum rebate, the study said. Alternatively, the study said policymakers could cut the payroll tax, but that would tend to benefit middle-income earners more than lower-income earners.

Those challenges aside, the study suggested that a swap of the carbon tax for a reduced corporate tax rate could be politically attractive given increasing interest in tax reform and in reducing the federal deficit, which has hovered near $1 trillion in recent years.

“Taxing carbon, reforming our flawed corporate tax system, and addressing long-term deficits should all be priorities for American policymakers,” according to the 18-page study. “Combining a carbon tax with corporate tax relief may open up possibilities for coalitions that could overcome the resistance” to either proposal if offered on its own, it said.

By Dean Scott  

The Urban Institute-Brookings Institution carbon tax study is at


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