What methods or policies might both mitigate costs for lower-income populations and increase economic efficiency?
An important consideration is how the use of allowance value could contribute to economic growth. Public finance economists have emphasized that using the value to reduce pre-existing taxes would spur economic growth and reduce the hidden costs associated with the policy. Those hidden costs stem from the introduction of a new regulatory burden in the economy that acts much like the introduction of a new tax. It may provide a disincentive to work to the extent it reduces the real wage. If revenue is used to reduce pre-existing taxes then it can mitigate most of this effect. Much of the economics literature suggests the efficiency gains from using emissions allowance value in this way can be very significant. As we have indicated with respect to policies to reduce the income tax, however, the effect can be very regressive because most of the benefits would accrue to those who earn the most income. We obtain similar, but less strong results for a reduction in the payroll tax. Each of thes
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