Quiggin: back of the envelope numbers on carbon tax v GST
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For both critics and supporters, the obvious starting point for analysis of the Garnaut carbon tax proposal is a comparison with the GST. Like the GST, the carbon tax is, effectively, a tax on consumption. While it will not be uniform, it will have some cost effect on most items of consumption. And, as with the GST proposal the aim is to return all or most of the revenue in such a way as to maximise economic benefits while minimising political costs. At a rate of $26/tonne, a broad-based carbon tax could be expected to raise around $11 billion or about 20 per cent of the revenue raised by the GST. The revenue can be expected to rise roughly in line with national income, given a 4 per cent annual increase in the real price, partly offset by a gradual decline in carbon emissions. But it is never likely to go much above 1 per cent of national income, and the predicted price effect is also around 1 per cent on average. These figures alone put Tony Abbott’s scare tactics about a Great Big New Tax on Everything into perspective. The government in which he was a minister introduced a genuinely New, Great Big Tax on Everything, with none of the disastrous effects predicted by its critics. If Abbott looks silly, how about the rightwing denialists for whom this is a plot to destroy the Australian economy, or even Western Civilisation as a whole? If the Australian economy were so fragile as to be significantly affected by such modest changes, it would have collapsed long ago. Nevertheless, in economic, and particularly political terms, it is important to get the use of the revenue right. The Rudd government’s CPRS proposal made a mess of this, with the incompatible desires of overcompensating most households and buying off all the rent-seekers in the business sector. In retrospect, they would clearly have done better to follow Garnaut’s advice and focus on protecting low-income and middle income households. Garnaut’s proposals are:
I haven’t done the sums in detail, but a back-of-the-envelope analysis makes it look feasible. Roughly speaking, the netting out could be achieved by scrapping the 30 cent tax bracket from $37 000 to $80 000, and merging it with the 37 cent bracket. The higher marginal tax rate would be offset by the end of the 4 per cent clawback under the Low Income Tax Offset, while the raising of the tax free threshold would end a lot of poverty traps for low income earners. Given a few years, and it might be possible to raise the tax-free threshold and lower the 37 cent threshold, so as to allow for a system in with only two rates, of which the higher (currently 45 cent) rate would apply only to the very well-off. While the benefits of simplicity in the tax system are often oversold, it is a beguiling prospect. Overall, Garnaut’s proposal looks both more economically appealing and more saleable than the Byzantine complexity of the CPRS. Perhaps its biggest advantage, as far as the government is concerned, will be the nasty puzzle it sets for Tony Abbott. Raising the tax-free threshold to $25 000 will take something like a million voters out of the income tax system. It would be a courageous Opposition leader who campaigned on a promise to push them back in. |
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31 Comments
But gee you’ve gotta admire thet Barnaby Joyce fella doncha? He sees a hole… any hole… and he just can’t stop from from sticking his head right in.
So shure’nuff when Barnaby seen the Gillard Girlie Guvvermint was handing out lotsa money because of this wicket wicket Carbonic Tax bizness, he just knewed it was wrong, wrong, wrong. Tony and Alan Jones had said it, so he jest knew. So Mista Joyce he’s gonna take dem tax cuts right back yessirree when he’s elected .
And that chance is now mercifully a little - perhaps a lot - less likely.
Implementation of the GST resulted in everyone being compensated, this Carbon Dioxide TAX ON EVERYTHING will only compensate a few therefore unlike the GST, this is about redistribution of wealth - another socalistic policy from this NO MANDATE government (and I use the term government lightly).
Good article! Interesting thoughts!
@ AC5506C3E6113FCED56257217E0321A1
And LORRY is no different to Barnaby Joyce! How stupid can you be! LORRY, please do not waste any more of this space and take some of your weird mates with you! This would be very much appreciated! Thanks!
Great analysis as usual John
I think your point about “raising the tax-free threshold to $25 000 will take something like a million voters out of the income tax system” is very poignant indeed. My guess is those people make up a substantial portion of the working poor socially conservative demographic long called Howard’s Battlers and believe there may actually be a limit to just how far they will go in voting Bigotry 1 to their own economic detriment
Labour have an unparalleled opportunity to take back that portion of their traditional base which have been lost to the dog whistling pied piper of reactionary conservatism over the past 20 years.
Let’s hope they don’t blow it:)
Mandate ? Core or non core mandates. Scripted or non scripted mandates is another question that needs to be addressed. No mandate needed for an Iraq invasion which seems odd. Doesn,t even require a full cabinet discussion much less a party discussion. The most abused word in politics and the most easily manipulated. Canada has a government that got 40% of the vote, first past the post. To lorry that is a mandate providing he backs the party the got the 40%.
Love your work Mr Quiggin.
I just wonder if there is enough time to attach the new income tax system with the carbon price legislation.
I’m all for it - but will it jumble up all the issues for those who are only slightly interested in politics and serious reform?
The government can’t wait till the tax summit to include it as part of the compensation package because that just gives the conservatives a free kick to continuously kick the govvy for another six months.
Plus what do Wilke, Oakeshott and Windsor have to say about it? Their opinions matter more than the oppositions (as a general rule, but also in particular during this hung parliament).
The real problem in this whole debate is that almost everybody has lost the plot. A tax on carbon dioxide emissions should be designed to substantially restrict or reduce consumption of carbon-based fuel. Any compensatory mechanism will act contrary to this effect. If you want to save the planet the price impost should be designed specifically to reduce or substantially eliminate consumption of carbon-based fuel to levels less than we are currently emitting today across the world as a whole. This is clearly impossible if China with one 15th of the per capita emissions compare with Australia wants to raise its 1.3 billion population to even 50% of Australia’s standard of in terms of energy consumption, what we do is irrelevant.
If the advocates of saving the planet are serious, there will be massive reductions in our standard of living. Whether this is a good thing or a bad thing is debatable but that is the reality. The Greens understand this but do not want to say it because of the electoral backlash.
Creating carbon taxes on one hand and then introducing compensatory mechanisms on the other should be quantified on the basis of the net carbon dioxide reduction compared with the cost, and an analysis of how much is being siphoned off for pork-barrelling purposes. The harsh reality is no matter what you do you will not be able to reduce carbon dioxide output sufficiently to have any significant effect without massive reductions in our aggregate standard of living, as there are no and I repeat no effective alternatives to fossil fuel other than nuclear energy which has anything like the potential to provide the energy input required.
All the chest beating about wind power solar power and alcohol/bio diesel fuels etc means nothing if you cannot generate the necessary energy input cost effectively from these sources. Raising tax-free thresholds to compensate for carbon taxes means that behaviour will not change. In simple terms if consumption of more expensive energy will be funded by tax cuts then the net result is zero for the environment. Fiddling around the edges with tax breaks and tax cuts is merely pork-barrel politics whilst the real problem is effectively being ignored. Consequently the carbon tax issue can be seen as nothing more than a redistributive mechanism because Labor is not serious about committing electoral suicide by cutting either employment levels or our standard of living significantly. The Liberals on the other hand have no policy other than fear mongering and hoping that labour will implode.
International reality is that China and India will continue to develop carbon-based energy sources for the next decade or two in an attempt to catch up with the West. If the Lotus eaters in Australia want to reduce carbon dioxide consumption as an example to the rest of the world of manifest virtue so be it, but the vast majority of Australians understand that they selfishly don’t want their standard of living to fall significantly, and also they realise that whatever they do will make bugger all difference compared to the impact of China and India.
Gee Greg, I thought the purpose of the carbon tax was to urge the polluters to change their practices to less carbon intensive ones so they can make money without damaging the planet. Thanks for putting me right. We can’t expect the billions in China and India to act responsibly whilst starving while we go merrily on our way doing nothing.
@ Greg Angelo
My apologies Greg. On re -reading your post I realised you weren’t saying what I thought you were first time around. You make very valid points. We will fry unless we all fundamentally change the way we produce and use energy and stop growing our economies at the expense of the planet. This is a big ask politically and the chance of success with vested interests pulling in different directions make it all the harder but thenwe all suffer the consequences if we fail.
Yes indeed, and for the relatively wealthy — people like me — there should be no compensation. People on or above my income tend to live much more Co2-hungry lifestyles, because we can, than those on low income.
@DavidK
Thank you for your clarification. I am actually taking a fairly neutral position and addressing the gross hypocrisy across the whole spectrum of political commentary and activity as a general rule. The solutions being postulated are substantially ineffective and presumably are only being promoted because of their political appeal. Any person with a logical capacity for qualitative analysis can very quickly work out that we have critical dependency on fossil fuels andthere is very little we can do to replace this dependency short of suicide or return to subsistence living. All of the green solutions are only token gestures because nothing is available to replace our basic dependency on fossil fuel. The political reality in China and other underdeveloped countries is that in attempting to emulate our standard of living that here will be a massive further increase of fossil fuel usage, and any initiatives undertaken by Australia will have no significant effect on anybody but ourselves. Our relatively high standard of living depends substantiallyon fossil fuel consumption forcommercial and home energy use and transportation for goods and transport services.
If you want a model of sustainable development look at the subsistence economy or the 18th century rural village when all of the energy used by the inhabitants for food, heating and lighting was totally generated within a few kilometres of the village centre. To a degree we could emulate this environment with a few low energy electrical uses such as telephones and telecommunications, and effectively we would have to obtain all of our energy usage from within a the village footprint area without importing energy from any external source such as coal or oil or minimal renewable energy. This suggestion is so impractical for a modern economy as to be unachievable. I do not have a solution, but the one being proposed by green activists will not work, so we have a real dilemma.
John
Good stuff; thank you.
I think Greg Angelo has a point in arguing that compensatory mechanisms may undermine the effectiveness of the scheme - especially when set in the context of what we expect this tax to achieve: the scheme, as presently set, will not reduce emissions by much early on, and we need to be ready to accept that, for now. To be fair to the tax scheme as presently proposed, there is probably no politically feasible alternative that could generate reductions nearer the desired level, given the poisonous political atmosphere surrounding this issue at present.
The Government remains cagey about exactly how much higher income earners will get back. Logically, they should get less, not for progressive taxation reasons only, but also because they are better equipped to reduce energy useage, or substitute whatever renewable energy does become available. Meanwhile, lower income people will have some options to improve their positions; some part of the tax rebate they receive could be put towards improving energy efficiency - something that would cumulatively reduce their energy bill as time goes on,as rebates keep coming in, and energy use declines. Small businesses might follow a similar trajectory. This would open the door to an effective emissions reduction regime; once people are in it, and see that their financial world has not come to an end, and as the evidence on climate change continues to firm, (leaving the opposition less room to indulge in their duplicitous position on this issue), attitudes will change. Potential alternative energy suppliers will be able to match their development programmes in line with observed price and consumption trends, and arguments about the trade and other hazards to our economy from non-participation in a global effort, will begin to penetrate.
We can believe Tony Abbott when he suggests he is definitely very concerned about the carbon tax; it’s just that what he is concerned about is not that it won’t work, but rather that it just might. The longer it beds in, the more heat will be taken out of the issue (double entendre intended), and the less hysteria he and his kind will have to work with.
Support the idea now; give it a couple of years to get started, and then re-convene and consider the options again.
So now we get to the ‘real’ reason for all of this… it’s a TAX. Nothing to do with environmental outcomes… Gillard wants more money to waste. A money go round that will make the Fat Cats happy, the Brokers who know how to shuffle the credits around, richer and who pays? Mr and Mrs UggBoot in the Burbs. Meanwhile I’ll turn off the gas heater and throw another log on the fire.
@ Greg and JIMD The reduction of our emissions is important but not the whole story. To my mind the more important issue is the transformative technologies that will be developed if suffficient resources are put into R&D. The only way this will be done is by allocating funds from a carbon price mechanism. The claim that nuclear is the only technology that can provide the energy we need is wrong. Geothermal has massive potential and like all the other renewables simply needs a carbon price set that gives it a level playing field with the fossil fuels. I don’t know of anyone who proposes the establishment of some sort of agrarian utopia but it would be nice if we could leave a little bit of biodiversity for future generations. Continuing to expand our populations and economies in a finite biosphere is worse than suicidal because it damns every other species as well as ourselves.
@GregA - there have been many dystopian/Arcadian stories written postulating rural economies with minimal but integral cutting edge technologies, from 60s AltTek hippeis to Le Guin’s ECUMEN genre, including much Oz sci-fi, from 19thC to Barnard Eldershaws Tomorrow and Tomorrow and Tomorrow and the current young’uns.
Many millions of peasants in roadless villages and slum dwellers in megacities in India & China, as just the most numerous examples apart from Asia, Africa & ex Soviet bloc, have made the leap over the energy intensive 20thC much of the West still insists on propping up, with cell phones & the Net without even mains electricity.
Oz could be the exemplar of such 22ndC Utopia/Erewhon given our mineral & food resources, small population and high education & social cohesion.
The most obvious is a greatly expanded web of railways running entirely on PhV, maintained by each town, council or hamlet through which it passed.
Motive power is usually the last redoubt of the fossils, nothing like compacted trees &n dinosaur faeces to burn for big ergs but we’ve seen where that leads.
Greg Angelo - Doesn’t that assume that business as usual is somewhere close to optimum? Which it can’t be right now, because we’re carrying too much political deadwood. Like an outdated tax system, and the fiscal imbalance between federal and state governments, to name just two areas for reform. A decent overhaul of those could more than make up for the excess burden costs of a carbon price within reason — as long as the carbon price is done efficiently, levied on consumption as Professor Quiggin describes, not production. The carbon revenue alone, without such reforms, will not cover the real costs of compensation, that would be like trying to put the juice back into the orange.
@ Davidk
“This is a big ask politically and the chance of success with vested interests pulling in different directions make it all the harder but thenwe all suffer the consequences if we fail.”
Overall I agree, but all suffer as a result…..not sure. Have you read about those underground ‘ark’ like structures they are building for the mega-rich to hide out in, in case of emergencies (war, terrorism etc). If for examples the planet does fry, and we lose 90% of the population, you can be rest assured that the 10% that do survive will be the ones that cause the problem in the first place.
“Raising the tax-free threshold to $25 000 will take something like a million voters out of the income tax system. It would be a courageous Opposition leader who campaigned on a promise to push them back in.”
Except the whole point of the carbon tax is to transition the economy into a carbon free one. So let’s say the Government is successful with that aim. The only people who pay the carbon tax are those who produce carbon. If they find ways of eliminating carbon (which is the aim after all), they stop paying the carbon tax. If they stop paying the carbon tax, that will result in significantly reduced revenue, then how does the Government maintain the tax cuts itself?
@John 64
You have hit the nail right on the head. The whole debate about compensation for carbon tax is full of woolly thinking and you have cut through the bullshit. Carbon taxes are required to reduce carbon-based energy consumption and any compensation will offset the effect of the tax allowing people to continue to consume carbon with no net effect other than whatever the politicians managed to siphon off for theirr own porkbarrelling purposes.
If the intention is to save the planet carbon taxes must reduce consumption levels and if the mitigation targets are serious, the impact will be absolutely severe. Carbon taxes on one hand and compensation on the other hand is a classic pea and thimble trick perpetrated on a relatively ignorant and quantitatively illiterate electorate.
Any policy predicated on the presumption that the rich will pay the poor will be compensated can only have one effect-income transfer to the point where all incomes are equal (shades of Animal Farm?).
I agree with Greg Angelo about the illogicality of compensating nearly everyone and not really changing any habits in the process. But I can also see that it is a process and that actually introducing the process is a major political hurdle. In the beginning nothing much will happen because that is the price the process has to pay in order to be introduced at all. Once in place and the political price paid, the screws can begin to be turned pretty quickly.
Raising the tax-free threshold might be “… a classic pea and thimble trick perpetrated on a relatively ignorant and quantitatively illiterate electorate”, but if that’s what it takes (and there’s no doubt that the political demand is for something “classic”) then what’s wrong with a pea and thimble trick?
Greg Angelo and others are falling into the cognitive error that the do-nothings have long been promoting - that full or even partial compensation nullifies the effects of the tax. Have a look at the prime minister’s response to this fallacy on her Q&A appearance.
If the compensation provided is NOT based on carbon consumption (ie $1 tax applied to fuel consumption = $1 compensation paid out to user of said fuel), and the compensation being discussed here is based on carbon-consumption agnostic reductions in taxation or refunds via the transfer payments system, then the tax produces a price differential between products that entail large carbon emissions (and hence incorporate a larger carbon price into their ultimate retail price) vs those products which use lower energy inputs/greener energy inputs/recycled carbon etc. ie lower carbon products become more price competitive, higher carbon products become less competitive. This competitive differential applies not only to end consumers of course, but also to business itself - businesses are always looking to lower their costs; as the carbon price bites they will be looking to use processes and inputs that have lower costs once the carbon price is taken into account - biasing business decision making towards lower carbon alternatives.
The 2 points raised:
1) if the carbon price is actually successful at reducing CO2e emissions substantially, it will remove its revenue generating capacity - this is true, but it is something that we can deal with in a budgetary sense over the next 40 years - it won’t happen overnight (although it would be fantastic if it did happen overnight!) As the article makes clear, at the moment the budgetary implications are relatively minor - it’s not like we’re suddenly going to need to find an additional 50% of federal taxation/expenditure cuts from thin air.
2) that to have any effect, the price of carbon needs to send us back to a middle ages subsistence existence. It is possible that that may be true at this point in time, unfortunately, however it is simply not sensible politically. There is still the possibility that we have enough time/room to move to commence a slow-and-steady transition, which is what a modest carbon price will encourage, that won’t result in much ‘quality of life’ impact. There are technologies that will step in to fill the void left by fossil fuels - bio diesel is almost guaranteed to be viable and efficient eg. We already have substitutes for electricity generation in the forms of rapidly decreasing cost of solar generation, wind generation, emerging technologies in geothermal, tidal, wave, etc. Relatively modest adjustments to lifestyles (not returning to subsistence farming) may still be all that is required, and that is the only possible starting point for a political discussion - the alternative is simply admitting defeat, that irreversible catastrophic climate change is unavoidable at this point in time, and that civilization and life as we know it are already doomed. That may be true, but there’s not point in not taking the hopeful/optimistic path rather than the nihilistic/suicidal public policy path.
Certainly if we had implemented a carbon price 20 years ago we could well be in a much better position than we find ourselves in now. Would have/could have/should have means nothing - we need to decide what we do NOW.
@jackol
You have misunderstood my point so I will try to repeat it in more explicit terms. My simple proposition is that if you want to reduce carbon dioxide output you have to tax usage. Taxing usage raises the price. If you compensate people for price increases in the aggregate, they do necessarily not have to change their behaviour , so there will be significant inertia in the system whilst people have the capacity to pay. Furthermore the rich and poor will both have to do with less carbon consumption because if you continue to redistribute income in compensation, we will all be poor.
Furthermore there is no quantitative analysis available from the governmentshowing how much tax needs to be put on carbon consumption in order to reach the professed 2020 target of 5% less than 2000 levels which is about 30% below current consumption notwithstanding population increases. despite the rhetoric this is an unachievable target and will be abandoned on practical grounds that it is unachievable without massive social dislocation.
Arguing for a gradual transition is fine except that according to the climate change advocates, we have already be gone beyond the tipping point, so unless drastic action is taken we have a potential disaster on our hands. Consequently to save the planet all carbon consumption should be taxed without compensation so that everybody bites the bullet simultaneously. Of course the Chinese and Indians will not do this as they are not beholden to Bob Brown so if we go down this path, will stuff up our economy but feel morally pure in the process.
I suggest that on the second issue of Middle Ages subsistence that you have a close look at the current dependency on fossil fuel in any advanced Western economy, and also look at the potential cost per kilowatt hour of energy from alternative sources for things like cement production, steel production, aluminium etc. For explicit information on this subject look at the input output tables of the Australian economy available from the ABS.
Renewable energy sources can only bea token contribution to this energy demand, even allowing for technological improvement. Nobody is putting forward seriously the alternatives such as geothermal power, large-scale solar power, and the huge problems of providing energy when the sun is not shining and the wind is not blowing. See how long you go running an aluminium smelter on solar power.
If you investigate the current capacity of solar and windpower to deliver reliable 24/7 power energy requirements you will be sorely disappointed. Furthermore if you look at the environmental effects of geothermal power there are significant adverse seismic side-effects as a consequence of the localised contraction of the Earth’s crust as heat is withdrawn.
I believe a transitional process to a carbon free economy is possible, but that the community will not accept the massive changes necessary so that there is a substantial political dilemma. I’m not advocating nihilism or suicide, but I’m sick and tired of being lied to by politicians who either do not understand the facts or wilfully misrepresent the facts to a gullible electorate. One of the massive changes necessary is a significant reduction in the world’s populationas you cannot sustain existing population growth levels and a transition to a carbon free economy simultaneously. This is the 363 kg (800 pound) gorilla in the room, and nobody is prepared to tell religious fundamentalists, either Catholic or more Islamist that their God-given right to reproduce needs to be curtailed.
Greg, you can’t tax s0mething and then make that revenue disappear. Even if the government figuratively burnt the banknotes the resulting deflation would amount to giving the money back. Even that act would be redistributive, towards those with savings (ie, the wealthy).
Given that a redistributive effect is inevitable, the task it to make the effect both socially wise and economically efficient.
You argue that the money-go-round won’t lead to a shift in consumption towards lesser CO2-emitting energy. It probably won’t in the short run, because those acts require investment and there aren’t that many instances when consumers buy whitegoods, cars and houses.
Which is why we also need direct legislation. So when those rare investment opportunities do present themselves then there are efficient whitegoods, cars and houses for consumers to choose.
The great unknown in all of this is the consumer’s elasticity of demand for particular CO2-intensive goods. This is particularly so with cars — on one hand we’ve seen that $10 added to a tank of petrol will flood public transport beyond capacity; on the other hand we’ve seen that some people use their cars as time optimisation machines, and people’s value of time is all over the place.
Greg Angelo,
So your argument is that regardless of what type of consumption occurs, there is simply too much consumption currently with western lifestyles and population to be able to effect adequate change. ie change must involve a significant reduction in total consumption as well as a change in the makeup of that consumption.
I don’t disagree per se.
That doesn’t alter the fact that a carbon price even with full compensation WILL result in a bias towards lower carbon production and consumption, which is what a lot of people seem to be misunderstanding, and what I was trying to correct.
A carbon price, with or without compensation, will have some effect in reducing our CO2e emissions.
Having said all that, and all that you said that I don’t disagree with, you haven’t said anything beyond ‘population and consumption need to be curtailed dramatically, and this is not politically possible’. ie you don’t see a solution. I was trying to make the case that ‘if we make what effort is possible, perhaps there is slim chance that the numbers will fall on the side of us making it through’ because I don’t see any hope in simply giving up, and I don’t see any possibility of a political case being made, at the moment, for radical change.
Perhaps that’s the compromise ground - some (inadequate) adjustment to our economy now, and over the next 10 years, will leave us in a better state than doing nothing; when the evidence rolls in with devastating certainty down the track, the adjustment required at that time will be that little bit less of a mountain to climb.
On the energy front, I think you are being overly pessimistic, and also pulling out some canards like ‘reliable 24/7 power energy requirements’ - we simply don’t need any substantial ‘base load’ - the daily cycle illustrates that the difference in consumption between daily peaks and troughs is massive - we don’t need a large consistent power supply, multiple smaller power supplies with storage capacity (pumping water up hills during excess capacity to power hydro-on-demand during troughs in production, or fly wheels, or batteries, or other stuff to be invented) to see us through the peaks is all that is required, and what renewable energy, along with geothermal, will be able to supply given the necessity of ditching fossil fuel sources.
I know there are challenges with geothermal, but I don’t believe that localized seismic side-effect are taken seriously, particularly in stable Australia where the sites for geothermal are quite isolated from population/production areas anyway.
Bio diesel - growing algae in vats to directly or indirectly produce liquid fuel - should be able to keep our agricultural industries going.
Energy efficiency measures have a long way to go in Australia, lots of low hanging fruit there.
Construction materials can be substituted - more wood, carbon fibre, less aluminium and concrete perhaps.
The point is to do what we can, to pull the levers NOW to try to change course, even if that’s going to be a slow and maybe inadequate measure. There is nothing to be gained by calling for society to go back to ‘living in caves’ - it won’t happen. So we do what we can. Politics is the art of the possible as they say; the possible may not be enough right now, but it’s all we’ve got.
A terrific discussion by one and all. None of the solutions to our problems will be anything other than HARD.Trying to claim otherwise is counterproductive. Nevertheless broad reform is essential for progress to be possible. By the same token trying to get up a progressive agenda in an environment where conservatism is lauded as a virtue is like trying to get a cat to swim. They scratch and bite and spit even if it is for their own good to save them from an approaching firestorm. When the danger is passed they will revert to type and treat you with contempt.Jackol is right to say we’d have been better off acting 20 years ago. Some of us have been calling for change since the 70s and the same suspects who call us loonies now were doing so then too. We shouldn’t blame them though. They were saving us from a marxist plot to bring down western civilisation.
GlenTurner1 - Actually, money does disappear in the process of taxation. It is very much like government taking your money, burning some of the banknotes, and then spending or transferring what’s left.
This is because some economic activities are done in a less efficient way to avoid the tax, and some activities are cancelled altogether. A tax collects no revenue from a transaction that never takes place because of the tax. It’s called “excess burden” or “deadweight cost” and it varies in severity from one form of tax to another. That’s why replacing some clunky taxes with GST had the net effect of lifting Australia’s aggregate standard of living: it collected more revenue for a lower total cost than the taxes it replaced.
A study commissioned for the Henry Tax Review estimated the excess burdens of a variety of Australian taxes. For example it estimates that incrementally reducing the company tax rate would return $1.40 to Australians (that’s Australian consumers, not just fat cats) for every $1.00 foregone in revenue. Please see table A on page 5 of the report here:
(( taxreview.treasury.gov.au/content/html/commissioned_work/downloads/KPMG_Econtech_Efficiency%20of%20Taxes_Final_Report.pdf ))
That’s why I said earlier, if a carbon tax can be designed well enough to have an excess burden no higher than some of the taxes shown, and if the compensation comes by way of substantial tax reform and/or other areas of regulatory excess burden, then the overall compensation level could match or perhaps even exceed the carbon tax revenue. Which form of compensation would you prefer: $1,000 in cash that you can easily count on paper, or a $1,400 reduction in the cost of living?
I don’t agree that money disappears. The analogy of “efficiency” applies to the use of money, not money itself. That is, all money flows through the system - irrespective on the (subjective) view of how “efficiently” it is utilised. However, this is an economy wide maxim. In the narrower context of a carbon price, the long term intention would (to me) be to have money ‘disappearing’ from the process as producers and consumers use more efficient and/or alternative power solutions.
Achieving this, will require more than a carbon price/ETS. The way our society both produces and consumes power will require to change over time. In our current state of western civilisation, electrical power is effectively a necessity of life. I certainly could not live or support my family without it. For this reason, I agree with a pragmatic approach of softening the introduction of the first steps via compensation. It is unreasonable (again to me) to potentially create a kind of an underclass based on the affordability of power.
John, you say: ‘While the benefits of simplicity in the tax system are often oversold, it is a beguiling prospect.’ I don’t regard flattening the tax rates as simplicity. The question is what is the tax base and how comprehensive it is. Complexity arises in part from using the system to differentiate between differing types of income and captial gains etc. In addition it is a fairly static view which says the Carbon Tax would only have a price effect of 1 percent. It will increase over time and to be effective in terms of making renewable energy efficient would need to be, according to the Greens, at least $100 per tonne. That isn’t going to happen, so the tax appears to be about moving from ‘bad’ CO2 to ‘good’ CO2 in the form of gas.
This appears to be a tax to save the accumulation of capital process from itself. And it will in effect impose the cost of pollution on workers as consumers, not the polluters as polluters.
I wonder how the GST compensation package stood up over time. Did it erode in value?
I must admit I hadn’t thought about your last point where you say:
‘Perhaps its biggest advantage, as far as the government is concerned, will be the nasty puzzle it sets for Tony Abbott. Raising the tax-free threshold to $25 000 will take something like a million voters out of the income tax system. It would be a courageous Opposition leader who campaigned on a promise to push them back in.’
Wow. Too true. Abbott will have real problems with that. A possible solution? He’ll leave that tax free threshold in in but will say the carbon tax goes, and cut 12,000 public servants from the payroll, and underfund education and hospitals even more than Labor. No carbon tax but you keep the tax cuts might be a Liberal slogan…
A price on pollution is a good idea but it is unlikely to stop pollution fast enough to make a difference. The cigarette companies are more profitable than ever and are selling, world wide, more cigarettes than ever before. Even with a price on pollution the polluting companies will still make large profits and they will not stop.
Another way to tackle the problem is to make renewables cheaper than fossil fuel energy. This can be done overnight by using interest free credit to build renewable energy plants. 50%+ of the cost of renewable energy is in interest charges. Remove these charges and extend the repayments of the loans over the life of the asset and almost all renewables are profitable. If they are profitable the loans will be repaid.
This approach will reduce the price of energy and as renewables become even more cheaper (we can expect each doubling of capacity to reduce the per unit cost by 20%) so fossil burning plants will become unprofitable. Old plants can be shut down by compensating the owners by giving them interest free loans to build renewable plants.
This approach will not cause inflation - rather it will reduce it because energy costs will drop.
This can all be done without any new taxes or new laws and it can start tomorrow.
Kevin Cox, there certainly has been a lot of bulldust about wind power costs. Wind costs are dominated by interest and land rent. Not really comparable to the resource- and labour-intensive running costs of a conventional power station on state-owned land.
To make things worse, when consumers choose to pay extra for “Greenpower” in their electricity bills, they are fooled into signing up to a system which specifically discriminates against renewable generators that were built before 1997. Apart from the Snowy Mountains Hydro scheme, that also eliminates a large number of wind farms built by Pacific Hydro and Babcock & Brown before 1997, which have had to compete with conventional power with abolutely no regulatory help and no help from well-meaning consumers. These pre-1997 renewable generators are treated the same as coal generators.
The purpose of this bizarre rule is to encourage new growth. But it’s designed by people who do not understand capitalism. The cut-off date of 1 Jan 1997 has moved several times, it’s a moving window. It gives all renewable generators a poor long-term financial outlook, because a new generator built today will only have a few favoured years before it too loses Greenpower accreditation, and then it will be treated the same as coal power by well-meaning consumers. That raises the cost of capital for renewable power, and lowers the share prices of companies that own wind farms.
The line that John Passant quotes from the author of the article is worth thinking about some more:
Normally in a constitutional commonwealth we consider there should be one set of laws that apply to everybody. We heard this a lot when somebody recently suggested introducing Sharia law for a subset of the community.
Is it really fair to have two classes of citizen? A class of taxpayers, and a class of non-taxpayers who are still able to vote on how the taxpaying class’s money is spent? It certainly is a clever political move by the government. Not very well thought out morally, it will indeed be divisive and bitter and very difficult for the next government to fix.