Max Weber Working Paper, with Stefano Verde.
Poterba (1991a) has much influenced the literature on the distributional effects of carbon pricing. The gist of Poterba’s study is that the distributional incidence of energy/environmental taxes across households is better appreciated if the relative tax burdens are measured against total expenditure instead of annual income. Interpreted as a proxy for lifetime income, total expenditure is more stable over time. As a result, the incidence of energy price increases is less regressive than when annual income is used. This outcome is often taken to lessen the relevance of equity concerns regarding carbon pricing. Almost twenty-five years after Poterba (1991a), Piketty (2014) revived the idea that wealth is a dimension of economic welfare constituting an increasingly important source of inequality. We show that omitting wealth in measuring ability to pay means underestimating the regressivity of carbon pricing and its inequity towards younger people. Using household-level data and statistical matching, we revisit Poterba’s application and compare the distributional incidence of the US federal gasoline tax for different measures of ability to pay: total expenditure, income and wealth-adjusted income.