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Key Findings

  • A variety of factors could influence the level of administrative costs of a tax, including the tax base; the tax rate; the exemptions, deductions or credits; and other factors.  
  • Given the limited empirical evidence available on the administrative burden of a carbon tax, it is helpful to draw insights from other tax policies, such as traditional excise taxes or a value-added tax. 
  • The administrative costs of an excise tax as a proportion of its revenue are generally lower than that of an income tax or a value-added tax, as an excise tax can be levied upstream on a small number of taxpayers. 
  • As a type of excise tax, a carbon tax’s total administrative costs may be relatively low. However, there are other design features that may make it slightly more complex to administer than a typical excise tax, such as its tax base and its border adjustment.
  • The closest proxy available for the administrative cost of a carbon tax’s border adjustment is the cost estimated for the administration of imports and exports in GAO’s modeling of a U.S. VAT — approximately 1 percent of the total administrative costs. This suggests that the administrative burden of a broad-based border adjustment under a carbon tax may not be as onerous as skeptics believe.

Introduction

A well-designed carbon tax is generally believed to be the most economically efficient policy to combat climate change. A carbon tax has gained more support from the business community recently. Doug McMillon, the CEO of Walmart and chairman of the Business Roundtable, announced the group’s support for a carbon price in September, declaring that “a national market-based emissions reduction policy is critical to reducing greenhouse gas emissions to levels designed to avoid the worst effects and mitigate the impacts of climate change.”

Policy analysis of a carbon tax typically focuses on several main components: the tax base (type of greenhouse gases taxed), the tax rate, the tax revenue and its distribution, the tax’s net effect on the economy, the implications for existing regulations, etc. 

There is scant literature, however, on the likely administrative burden of a U.S. carbon tax. This is not surprising as administrative costs are difficult to measure, and there has not been a federal carbon price policy in the United States. 

This paper analyzes the administrative burden of a U.S. carbon tax by offering a conceptual analysis of the complexity of taxation in general, comparing that complexity across common types of taxes, and drawing insights from the administrative burden of traditional excise taxes and a value-added tax. 

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