Low-income households could be hit hardest of all if America's potential solution for improving the economy becomes law, according to a Brookings report.
A carbon tax, which, unlike most taxes, is favored by economists, could raise the GDP by 1 percent. In addition to increased revenue, proponents say this tax could reduce greenhouse gas emissions by 14 percent and cut Americans' dependence on foreign oil.
For households with low-incomes, most of their earnings go toward consumption. This would tax a larger percent of their income than other financial classes. However, these negative implications could be offset through refundable tax credits or payroll tax credits, according to the report.
Economists support the carbon tax because they say it corrects market failures and can make the economy more efficient. It places the tax burden on consumers of energy, which in turn lowers the consumption of fossil fuels.
Although the United States has never had a tax like this, it’s been implemented in Scandinavian countries, the Netherlands, Germany, United Kingdom and Australia. In Europe, the Brookings report says the tax significantly reduced emissions.