Daily Chart: How Progressive is Cap and Trade?

250 smoke paul j everett flickr.png

Is cap and trade going to screw the poor? Turns out there is some debate about this. You have the Tax Foundation going on about how the costs of cap and trade will be "disproportionately borne by low-income households," and Warren Buffett saying that cap and trade is "probably going to be pretty regressive." And then you have the CBO's weekend estimate of what cap and trade will cost the individual families, which both Kevin Drum and Matt Yglesias use to make the point that poor families will actually do pretty well.

Cap and trade is a system for reducing carbon emissions in which the government sets the overall level of pollution that can occur (the "cap") and then auctions or distributes pollution permits that companies and households can sell (the "trade"). Because this puts a price on carbon emissions, it will raise companies' operating costs. (Of course, putting a price on carbon, and thus a price on damaging the environment, is the whole point.) And those costs will be passed onto consumers. But cap and trade also generates revenue -- if the permits are auctioned off -- and that revenue can be used to partially offset the increased household costs.

The CBO estimate says that, under the cap-n-trade plan currently being considered in the House, the average family will face additional costs of about $165 a year. Families in the lowest income quintile will actually see a benefit of $40, largely because some portion of the revenue will be used to fund a rebate and tax credit for low income families. Families in the top quintile will pay an extra $245 dollars a year. That looks pretty progressive. But families in the second highest quintile will end up with an additional burden of $340 a year -- more than the wealthiest Americans. How to make sense of this?

I thought I would make a chart of how the distribution of cap-and-trade costs compared with that of other federal taxes. In the chart below you can see who is paying for cap and trade, compared with (1) all federal tax liabilities; (2) the federal income tax; and (3) federal social insurance taxes. (All of the data is drawn from the CBO series on federal tax distribution.)

cap and trade share by income.png

If you look at only the bottom quintile, C&T is more progressive than anything else in the federal tax system. But it's downhill from there: The share of cap and trade paid by the middle quintile is three times the federal tax system's average, and the share paid by the richest quintile is half that of the average.

I don't really have a strong normative point to make here. Progressivity is in the eye of the beholder and all that. Nonetheless, I hope this puts some of the debate over the burdens of cap and trade in context.

Housekeeping note: From now on I'm going to try to publish one original chart each weekday morning. If this proves too tiring or boring I will happily abandon the effort. And if I get lazy I might publish other interesting charts that I find around the Internet. But I like making these charts and, like Conor Friedersdorf, think it's an important part of blogging. Suggestions always welcome.