a. Define what a revenue neutral tax is? b. Why does the Oregon report state not
ID: 1112348 • Letter: A
Question
a. Define what a revenue neutral tax is? b. Why does the Oregon report state not to use all the revenues from the carbon tax to reduce personal income taxes (Scenario 2.2)? How does the report recommend distributing the revenue gained by the carbon tax? Why do they recommend this option? c. Was the carbon tax in British Columbia effective in reducing fuel use? Why was it necessary to compare the changes in British Columbia with what happens in the rest of Canada? d. Why is it important to consider distributional impacts when implementing policies such as a carbon tax? e.Explanation / Answer
Answer - a) - In the context of carbon taxation, state authorities may structure taxes as either revenue-positive or revenue-neutral. Revenue-neutral is when all revenue from the tax must be returned or repatriated to taxpayers through tax cuts, or credits, essentially creating a tax shift. Also, the goal of revenue neutrality doesn't explicitly specify any repatriation structure or scheme. In contrast to this, revenue-positive is when some of the carbon tax revenue is retained and reutilized by the state.
Answer - b) - The Oregon report state not to use all the revenues from the carbon tax to reduce personal income taxes because low-income households have limited supply of money and out of that limited supply, they devote a large proportion of their income to energy expenditures and thus, would be disproportionately negatively impacted by the increase in energy costs. High-income households receive most of the benefit when rates are cut because they pay a disproportionate portion of personal income tax.
Also, returning revenues to households generate less economic activity as large portion of repatriated revenue would go toward consumption. This type of spending leads to small economic multiplier and there is no longer-term investments that can provide immense economic benefits in future.
Answer - c) - The report recommended that revenues can be used to eliminate the distortionary effects of existing income taxes. The reinvestment of revenues in public works and energy efficient programs can be help to stimulate growth. This would create a tax-system that disincentivizes emissions while promoting output that is less energy intensive. It would help in contributing to Oregon's climate goals, and provide revenue for those state activities which are undefunded. These reinvestments can also be used to offset competitiveness issues. Careful program design can also offset the potential extra burden on low-income households.
Answer - d) - Yes, the carbon tax in British Columbia was effective in reducing fuel consumption. The consumption of refined petroleum products between 2008-2011 decreased by 15.1% in British Columbia. It is necessary to comapre the changes in British Columbia to what happens in rest of Canada because growth in the British Columbia economy was at similar rates with rest of Canada since carbon tax went into effect and although consumption of refined petroleum products between 2008-11 decreased in British Columbia, it was increased by 1.3% in the rest of Canada and the consumption of motor gasoline in the same period decreased by 4% in British Columbia and increased by 3.3% in the rest of Canada. Thus, by comparing these two, we can conclude that carbon tax can be a potential approach where jobs can increased and consequently, overall economic activity can occur in conjunction with reductions in carbon emissions and environmental damages.
Answer - e) - It is necessary to consider distributional impacts when implementing policies such as a carbon tax because these types of taxes or energy taxes are regressive in nature with respect to income levels, and thus, place a disproportionate burden on lower-income households. Lower income households can spend as much as quarter of their income on energy as opposed to high income households which usually spends less percentage of their household income on energy needs.
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