Role of carbon tax in a sustainable economic growth

The worldwide increasing concern for climate change persuades policy makers to take into account also the environmental aspects when designing and assessing the effectiveness of economic policies. Fiscal reforms can be combined with environmental measures to achieve the complex target represented by economic growth and environmental protection. In this vein, this study proposes the reorganisation of federal taxation on corporate and personal income in USA, financed by the introduction of a carbon tax on economic activities. The study uses a dynamic CGE model calibrated on a U.S. Social Accounting Matrix (SAM) with environmental accounts. The economic, socioeconomic and environmental impact assessed in this study give two major policy recommendations. Firstly, the reduction of personal income tax is more geared to economic growth compared to the reduction of corporate income tax. Moreover, not to be detrimental for growth, the carbon tax introduction must be part of a policy framework. Indeed, if the personal income tax reduction is financed with the introduction of a carbon tax on economic activities, there is no harm to the economic growth and a benefit for the environment arises.