An OECD Working Paper published in February 2015 explores the relationship between environmentally related taxes and inequality in income sources. The paper looks at whether there is any difference between countries that have implemented environmental tax reforms and those countries which have not yet done so. Inequality of income sources was measured using the disposable income-based Gini coefficient. All the OECD countries were examined for the period from 1995 to 2011.
The empirical models revealed no statistically significant relationship between the share of environmental taxes in total tax revenue and inequality in the income sources. The relationship varies however according to the particular taxed activity being examined and according to the existence of a specific mechanism for redistributing environmental tax revenues.
In countries without such redistributive mechanisms energy tax revenues as a percentage of GDP have a small positive relationship with income inequality. In countries where energy tax revenues are, at least partially, used to reduce tax burden on income and labor, there is a negative relationship between energy taxes and inequality in income sources.
No significant relationship is identified between motor vehicle and other transport tax revenues and income inequality. Revenues arising from other environmentally related taxes are negatively associated with income inequality, even if there is an explicit revenue recycling mechanism.
Another recent OECD study showed that distributional effects also vary among different types of energy taxes. Taxes on motor fuel usually have a progressive or proportional effect, while taxes on electricity and heating are to some extent regressive. Future analysis could look at whether the relationship between energy tax revenues and inequality in income sources also varies according to the activity taxed. The study of the relationship between different components of motor vehicle and transport taxes and other environmentally related taxes and income inequality could help to identify specific activities and commodities for which environmental tax revenues have a significant relationship with income inequality.
Future research could also look at the relationship between the use of alternative policy instruments to environmentally related taxes and inequality in income sources. Such instruments include technology- or performance-based standards. Certain appliance standards might reduce or eliminate the lower end of a market because appliances with low investment or operating cost ratios would not meet the required standards. This could create distortions in labor market equilibrium and have an effect on employment and wage distribution. The effect of alternative policy measures on income inequality should therefore be considered when looking at the effect of environmentally related taxes.
The short term costs of the introduction of an environmentally related tax are of high importance when considering tax policy. It is therefore worthwhile to look at providing explicit revenue recycling mechanisms when preparing the introduction of environmentally related taxes. Recycling mechanisms could include lump-sum redistributions; reductions in personal income taxes; increases in tax-free allowances; reductions of non-wage labor costs or reductions in corporate income taxes to boost employment. The mechanism should be designed in a way that ensures that lower income households benefit from the redistribution of tax revenues. Further research is needed to look at this aspect of tax policy.
