Carbon Tax cuts for all

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.