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Contingent loans to reduce taxation and greenhouse gas emissions

By Kevin Cox - posted Monday, 2 February 2009

One of the functions of the tax system is to redistribute wealth within the community. At the moment this is normally achieved by taxing the profits of individuals and organisations and then distributing some of the taxes to other individuals or organisations according to different policy objectives.

There is another parallel approach that is already in use. This is the idea of contingent loans such as HECS, where zero interest loans are given to individuals for them to spend on education and then for them to pay the money back through the taxation system. That is, the money is given first and then collected.

This is the reverse of collecting tax and then distributing it. Although over the longer-term the amount of taxes collected is the same, it removes the need to collect taxes first to pay for projects that increase community productivity. It will significantly reduce the amount of taxes collected in the early years.


In particular the idea can solve the current financial crisis, reduce greenhouse gas emissions and distribute new wealth to the needy as well as the already wealthy.

Major policy issues

At the moment the government is confronted with the problem of how to provide fiscal stimuli (spend money) to keep the economy operating in the face of a world-wide contraction of credit, and at the same time find ways to reduce greenhouse gas emissions. These two problems have a single solution.

A scenario

The government issues zero interest loans to individuals, and requires the individuals to invest the loans in ways to reduce greenhouse gas emissions. The loans are distributed by non-government organisations (NGOs) like banks or community groups. The loans are paid back from the tax on the profits from the investments. Loans are given to anyone who volunteers.

The size of a loan is in inverse proportion to the person's previous consumption of mains electricity. The loans must be spent in a licensed market place in infrastructure to reduce greenhouse gas emissions. The market place requires both buyers and sellers to provide ongoing information for the market place to calculate the effect of sales on emissions.


Outcomes of the scenario

The cost of renewable energy will become less than the cost of fossil fuel energy. This happens because the finance costs of interest on capital and repayments are removed from renewable energy infrastructure costs.

One of the investments in the market place will be direct investment in companies that produce renewable energy. As finance costs are the major costs of renewable energy plants, this immediately makes renewable energy profitable and people will be encouraged to invest their loans in renewable energy companies as they will get a good return on their investment.

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Previously published on Henry Thornton's blog on January 27, 2009.

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About the Author

Dr Kevin Cox is an entrepreneur. Previously he has taught Information Systems in Canberra and Hong Kong and worked with computers for various multinationals in Australia, the USA and Indonesia.

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

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