Distributional effects of a carbon tax in broader U.S. fiscal reform

This paper analyzes the distributional implications of an illustrative $15 carbon tax imposed in 2010 on carbon in fossil fuels. We analyze its incidence across income classes and regions, both in isolation and when combined with measures that apply the carbon tax revenue to lowering other distortionary taxes in the economy. Consistent with earlier findings, we find that a carbon tax is regressive. Using tax swap simulations, we then subtract the burden of other taxes the carbon tax revenue could displace, and compute the net effect on households under three assumptions about how capital and labor income might be distributed. •Shows that a carbon tax by itself is regressive.•Burden of a carbon tax may be offset partly with a corporate tax swap.•Higher income households face negative tax rates under corporate tax swap.•Corporate tax swap results in wider regional variations in burden than labor tax swaps.•Adding sources side incidence of carbon tax makes tax less regressive.