Carbon Tax cuts for all

Whatever you think about climate change, a carbon dioxide tax is no reason to expand government, boost handouts or redistribute wealth. If Australia ends up lumbered with a carbon tax, all the revenue must be returned to taxpayers. Bigger government retards efficiency and undermines individual freedom and responsibility.

Yet Professor Garnaut in his latest Review suggests less than 50% of the $12 billion raised from a $26 a tonne carbon tax be used to cut taxes. He wants the rest to ‘assist’ industry, boost welfare and subsidise ‘innovation’ funds, all of which bolster the public ledger.

Industry should get little. As Professor Garnaut rightly notes in his latest review, “households will pay almost the entire carbon price as businesses pass carbon costs through to the users of their products”.

To be sure, Australian exporters can’t pass on extra costs so easily. Foreigners could buy from countries without a carbon complex. But Asia’s insatiable demand for our exports should grease the wheels of transition.

The hundreds of millions of dollars wasted on the Green Car Innovation Fund should be a red flag to pouring billions more into further ‘green research’. Indeed, the departments of Climate Change and Innovation already have 3,200 bureaucrats and cost $5 billion a year between them. Perhaps they could make do with existing resources and companies could conduct their own research.

Upfront increases in government pensions and allowances are not necessary either. The government does not bring forward indexation when Queensland weather unexpectedly plays havoc with fruit prices. Yes, price increases erode payment values, but automatic indexation occurs regularly.  The Age Pension is even linked to the Pensioner and Beneficiary Living Cost Index, which specifically reflects the expenditure patterns of pensioners.

Tax cuts have the potential to mitigate whatever damage a carbon tax might cause. In stark contrast to increasing government spending, cutting taxes encourages a virtuous cycle of work, enterprise and administrative efficiency, as Professor Garnaut notes.

But his recommended cuts are neither fair nor affordable. Raising the income tax free threshold to $25,000 from its present $6,000, an idea from the Henry review, is laudable. But it would cost more than double the touted carbon tax revenue.

Professor Garnaut’s solution is to hike taxes on people earning more than $80,000 a year by “adjusting thresholds and or rates”. This is blatant, populist redistribution. All taxpayers would have to wear price increases; all should be compensated.

Nevertheless, Professor Garnaut’s recommendations are a beacon of sense compared to the government’s likely proposals.

Back in 2008, Professor Garnaut similarly recommended that revenue from the Rudd government’s ill-fated Carbon Pollution Reduction Scheme be used for “efficiency-raising...reductions of distortionary taxes”.

Yet the government’ measures were a ‘how to’ guide in tax vandalism. It proposed increasing the pernicious Low Income Tax Offset, a poverty trap that burdens taxpayers earning up to $67,500 with 13% higher effective marginal tax rates, and which the Henry review recommended be abolished. It planned to boost pensions and allowances by roughly twice the predicted price increases. Perhaps worse, the government wanted to increase ‘family payments’, preferring to entrench dependency rather than let people choose how they spend their money.

I am not expecting the Gillard government, whose response to the Garnaut review is due soon, to show much more sense. Using any carbon tax revenue to increase the tax-free threshold ($14,000 might be affordable) is tempting. It would return about $1,200 a year to most workers – and proportionately most to those who pay the least tax. But unless any higher tax-free threshold is indexed, the increase is gradually whittled away by inflation. Moreover, $12 billion is not enough to lift the tax-free threshold above the level of government pensions. Welfare payments would continue to overlap with tax system.

Cutting rates of income tax is a better way to return revenue to workers. Rate reductions are immune to inflation and difficult to reverse. Moreover, unlike increasing the tax-free threshold, cutting rates makes extra work more attractive.

Mooted carbon tax revenue would provide enough money to shave a few percentage points off the 15% or 30% marginal income tax rates, say, which effect the majority of Australians’ work decisions. Alternatively, the government could abolish the deceitful ‘Medicare Levy’, which raises about $9 billion a year and is nothing more than income tax by another name.

The tax on carbon dioxide is supposed to alter behavior and reduce carbon dioxide emissions, not redistribute income. Pitting Australians against each other corrodes their respect for public policy. In any case, one big tax cut for all taxpayers would be far easier to sell than a smattering of subsidies, handouts and redistributive sleights of hand.