Opinion & Commentary
Carbon tax could have united us all
THREE dollars a year. That's how much of a tax cut Australians earning more than $80,000 a year get when the government's $23-a-tonne carbon tax begins next July. The government estimates average household bills will rise by 0.7 per cent on average as a result, or $515 a year.
More than 3 million households will be worse off come July, about a third of Australian taxpayers. Indeed, many thousands of individuals with incomes between $67,000 and $80,000 face the prospect of their marginal tax rate being bumped up to 33 per cent - the first rise in a key income tax rate since the early 1980s.
Sure, 4 million lower-income households and ''working families'' will be better off and another few million no worse off as a result of the government's planned tax tweaks and welfare windfalls.
But any need to cut carbon emissions should not mean wholesale wealth redistribution. A warming planet does not have to mean bigger government and higher taxation. Even John Maynard Keynes thought the ''maximum tolerable'' limit of government taxation was 25 per cent of gross domestic product. It is closer to 35 per cent in Australia.
Yet the government will spend about half of the annual $8 billion in carbon tax revenue to over-compensate welfare recipients, create wasteful and unnecessary new bureaucracies and boost the bottom line of big companies along with its own revenue and expenditure ledgers.
It did not have to be like this. A carbon tax could have united fervent environmentalists and economic rationalists, whatever the latter think about ''climate change''.
After all, a carbon tax is a consumption tax in green garb, but one which also happens to discourages carbon emissions, a byproduct of almost all goods and services.
Any mechanism that engineers a dollar-for-dollar income for a consumption tax swap can be beneficial. Income tax, ''absurd and destructive'', wrote Adam Smith, is a tax on effort, creativity, and saving. It generates massive administrative complexity, especially when levied on the bulk of lower and middle-income earners.
All the revenue from the carbon tax should have been returned equally to all taxpayers, not half of it to some.
The bulk of taxpayers could have enjoyed roughly an $800-a-year tax cut. The vast majority of people could have been better off under a carbon tax after some modest behavioural adjustment.
Pensions and allowances need not suddenly increase. They are already indexed to prices and have been for decades. Alas, blatant political vote buying seems more and more part and parcel of Australian democracy. Perhaps good economists should not be so scathing, though.
After all, the Gillard government's clean energy plan is much better than Kevin Rudd's ill-fated carbon pollution reduction scheme. Rudd's plan snubbed tax reform, choosing instead to increase the pernicious low income tax offset (LITO) - which subsidises sloth and burdens low-income earners with higher effective marginal tax rates - and increase welfare payments by 2.5 per cent, more than double the predicted price increases.
This government is at least opting for some genuine reform. Reining in the LITO from $1500 to $300 and reducing its range is good. And the better alignment of statutory with actual marginal tax rates is a victory for transparency and integrity. Yes, the 15 per cent rate will become 19 per cent, but that is what it already is in practice for many taxpayers.
The surprise tripling of the tax-free threshold to $18,200 is welcome, if long overdue.
Effective marginal tax rates will fall and about a million people will no longer pay income tax at all - a win for simplicity and workforce participation.
Lifting the annual tax-free threshold above the level of pensions and allowances curtails the messy and debilitating interaction of the tax and welfare systems.
Nevertheless, bolder tax reform - and equity for moderate income earners - has been sacrificed to the altar of corporate welfare and bloated bureaucracy.
About a third of the revenue will go directly to carbon emitting companies, who will get 94.5 per cent of their carbon permits free, despite Professor Ross Garnaut's advice that ''households will pay almost the entire carbon price as businesses pass carbon costs through to the users of their products''.
As for ''trade-exposed industries'', plenty of other factors already make the cost of doing business higher in Australia and they do not attract tax offsets.
A carbon price is either a cost of doing business or it's not. Sky-high commodity prices would mop up any input tax that can't be passed on.
A whopping $382 million is to be spent to administer the carbon tax package for its first three years, near the annual cost of running the Reserve Bank and the federal Treasury. At least five new bureaucracies will emerge, including the Clean Energy Regulator, the Climate Change Authority, the Clean Energy Finance Corporation, and the Australian Renewable Energy Agency.
These Orwellian quangos smack of the ''direct-action'' policies the government derides the opposition for pursuing.
They contradict the government's argument that a carbon tax provides ''a powerful incentive for businesses across the economy to cut their pollution by investing in clean technology and finding more efficient ways of operating''.
Fine, so why shovel billions of dollars into public bodies and industry subsidies? Indeed, taxpayers already spend a massive $750 million a year on innovation in low-emissions technology. Should we not first ask if that money is well spent?
Although the tax cuts are not distributed fairly, the government's proposals improve the structure of the income tax system. Whether the tax and spending package is beneficial overall is doubtful, however. Too much of the revenue is wasted on bureaucracy and subsidies.
People earning more than $80,000 a year can look forward to further changes from 2015, however: a five-fold increase in their tax cut, to 31¢ a week.Adam Creighton is a research fellow at The Centre for Independent Studies.
