Is Cap and Trade Fair to the Poor? Short-Sighted Households and the Timing of Consumption Taxes

TLDR: The authors survey a wide array of evidence suggesting that poor households lack affordable mechanisms for both borrowing and saving, such that a lump-sum rebate, or even monthly rebates, would not leave the household as well off as they were in the absence of any tax.

Abstract: Many forms of consumption tax, including recent proposals to impose a tax on the use of carbon, impose disproportionate burdens on the poor. Commentators who propose mitigating this impact with tax rebates for low-income families have overlooked the importance of the timing of consumption for these households, as well as the difficulties of “smoothing” income from one time period to another. We survey a wide array of evidence suggesting that poor households lack affordable mechanisms for both borrowing and saving, such that a lump-sum rebate, or even monthly rebates, would not leave the household as well off as they were in the absence of any tax. In addition, we show that the cognitive features of a rebate will be problematic for short-sighted households - those who heavily favor the present over the future. For example, they may impatiently spend rebates too quickly, leaving little money for later necessities, and potentially increasing overall carbon usage. And they likely will procrastinate both learning how to overcome these problems, as well as putting off investing in less carbon-intensive goods. We do not, however, argue against carbon pricing. Instead, we offer new methods of structuring taxes and rebates to overcome these problems. For instance, we suggest that rebates be offered on a “self-directed” debit card, subject to a sticky default cap on weekly withdrawals. This implement “nudges” short-sighted households away from impatience, while offering affordable credit and modern banking to all. These same mechanisms can be used for other forms of transactional consumption taxes, such as state sales taxes or a possible national value-added tax.