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Naked truth is better for selling tax

By Geoff Carmody - posted Thursday, 1 July 2010


Politicians can be economical with the truth when discussing the effects of policies they're selling. They'll rarely admit new policies can cost ordinary Australians. They'll argue such effects are zero or minimal. They'll say somebody else - preferably non-voters - will cop any adverse impact.

Nowhere is this truer than in the case of new taxes. Politicians often argue consumers won't pay, sheltering behind their legal incidence (that is, the other parties legally obliged to pay the tax). Legal tax obligations don't stop the tax burden being shifted to somebody else. It usually is.

Politicians can tie themselves in knots tiptoeing around this cost-shifting common sense. This undermines their credibility.

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Here are some examples.

Comprehensive climate policies require a broad-based price on emissions. This increases production costs. These will be passed on down the supply chain to consumers. That's as it should be. A price on carbon is the supply chain signal needed to encourage a shift from high-emission products to low-emission products.

Some politicians (the Greens are among the worst) pretend big polluters, not consumers, pay carbon prices. Mainstream parties also favour emissions trading schemes because big polluters legally must pay for emissions permits. They also like the charade that the market sets the carbon price, not governments.

These claims are dishonest. Big polluters pass costs on where they can (to Australian consumers) or shift production overseas (where they can't and profits fall below overseas opportunities). Under an ETS, governments set carbon prices by limiting total emissions permits. The ETS has no effect on emissions. It just shuffles them, once governments set the cap via total permits issued.

The Australian opposition has a direct-action alternative climate policy. It's opposed to a “great big new tax on everything”. It supports subsidies for emissions reduction initiatives. These subsidies could grow without limit. But somebody must pay for them. Voters will pay for direct action, including through higher taxes.

Broad-based climate policy would be easier to sell if politicians were honest about what was needed. A comprehensive carbon price raises consumer prices, concentrated on high-emissions products. That's a fact.

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Governments get lots of revenue, from ETS permit sales or a carbon tax. Most of that extra revenue can be used to cut income (and other) taxes, and increase social welfare payments.

Let's be clear. Climate policy is intended to raise prices of emissions-intensive products compared with greener products. It's not intended to cut real incomes. Using most of the revenue from a carbon price to cut other distorting taxes and increase welfare payments can achieve the first effect and avoid the second.

Why can't politicians just say this rather than hiding the cost-shifting reality? It would make their job easier.

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First published in The Australian on June 24, 2010.



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About the Author

Geoff Carmody is Director, Geoff Carmody & Associates, a former co-founder of Access Economics, and before that was a senior officer in the Commonwealth Treasury. He favours a national consumption-based climate policy, preferably using a carbon tax to put a price on carbon. He has prepared papers entitled Effective climate change policy: the seven Cs. Paper #1: Some design principles for evaluating greenhouse gas abatement policies. Paper #2: Implementing design principles for effective climate change policy. Paper #3: ETS or carbon tax?

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Creative Commons LicenseThis work is licensed under a Creative Commons License.

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