Tax progressivity of carbon and gasoline taxes: the role of income inequality

Julius J. Andersson and Giles Atkinson

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We present a simple model showing how income inequality and the income elasticity of demand jointly shape the tax progressivity of indirect taxes, with rising inequality increasing the regressivity of taxes on necessities. We test the model’s predictions by analyzing the Swedish carbon tax on transport fuel. We find that the tax becomes increasingly regressive over time, closely tracking rising income inequality. We also show that the relative incidence shifts from regressive to progressive when using annual expenditure rather than annual income as the welfare measure, as expenditure is more evenly distributed. A cross-country analysis of gasoline taxes in high-income nations further supports our findings, establishing a strong correlation between higher inequality and greater regressivity. Our model helps policymakers identify when complementary redistributive measures such as lump-sum transfers may become necessary.

Keywords: tax progressivity; income inequality; gasoline taxation; carbon taxation (search for similar items in EconPapers)
JEL-codes: D31 D63 H23 H24 Q58 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2026-06-30
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Published in Environmental and Resource Economics, 30, June, 2026, 89(6). ISSN: 0924-6460

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