NEW taxes, like the carbon tax, naturally alarm people. In the mid-1690s, for example, the revenue in England was being depleted by, among other things, people clipping coinage. A mooted income tax was decried as an impossible invasion of privacy. Instead a window tax was introduced in 1696. You paid tax if you had more than 10 windows.
It was a silly tax because it was easy to avoid was the window tax. One simply blocked up the excess windows. You can still see houses in Britain with bricked up windows.
It would be another 142 years before Britain introduced a more sensible income tax. Perhaps it will take that long to convince some members of the Opposition.
Taxes have two main purposes – to raise revenue and to discourage the conduct being taxed. In the case of the former, governments do not want people to avoid the tax. In the case of the latter, that is the very aim of the tax – society would be better if everyone avoided the tax.
Most countries tax tobacco heavily. Australia would be a better place if everyone avoided the tax by not smoking. Similarly, if on-the-spot fines were considered a tax on speeding, it would be better if everyone avoided the tax. Even without the revenue, government finances would be better off in the long run because government would not have to pick up the tab for the sick and injured.
Other taxes, are aimed at raising revenue, but have the inadvertent side effect of discouraging the taxed transactions, even if those transactions would have been beneficial for society. Stamp duty on property transfers is a good example. The duty discourages people from buying and selling houses, from moving closer to work or moving to larger or smaller dwellings rather than extending or living in a half-empty house.
Taxes should be efficient and fair. As the Henry report noted earlier this year, Australia has some quite efficient and fair taxes (income and the GST) and some quite inefficient and unfair ones.
Now what of the carbon tax? The well-heeled actress Cate Blanchett and others have been roundly condemned as hypocritical for supporting it. The supporters of the carbon tax tend to be big carbon users and wealthy enough not to be affected by it. The poor struggling masses, on the other hand, oppose it because they cannot afford it.
However, this portrayal is awry. These wealthy people are in fact advocating that they be hit with higher taxes, unlike the miners and business. They are calling for a tax that will change their behaviour or go towards whatever the Government has in mind to do with the proceeds of the tax, most likely compensatory tax relief to the less well off.
Indeed, the less well off can profit from a carbon tax. They can take the compensation and then start reducing their carbon footprint, even in little ways. This is the very point of the tax.
A good analogy was Telstra’s plan to charge everyone 20 cents for directory calls. The reaction was outrage — like the reaction to the carbon tax. But Telstra proposed to give everyone $5 a month off their bill – financed by the millions it was costing to man the “free” directory service.
The hard-done-by battlers merely had to look up their own numbers and they would make $5 a month. Telstra, too, would be better off. Similarly, with carbon.
The question remains, however, will we be better off if we reduce our carbon consumption? What if the extra carbon going into the atmosphere is not changing the climate? What if Australia’s contribution does not matter a jot?
As it happens I accept the science that the carbon is changing the climate for the worse and that Australia should do something about it on moral and practical grounds. If things get worse (cyclones, tornadoes, floods, droughts) the world will force us to act anyway as it does with trade, air-traffic control, ocean pollution and a raft of other matters.
But let’s be climate-change deniers or just selfish Australia-should-act-last proponents. Would it still be good tax policy to have a carbon tax? It depends what you do with the money.
At $26 a tonne, the tax would raise about $15 billion on current usage of 28 tonnes per person per year.
As it happens, one of the nastiest, silliest, most inefficient taxes in Australia also raises about $15 billion a year: payroll tax. If the carbon tax replaced payroll tax, Australia would be much better off – climate change or not.
Opposition Leader Tony Abbott could hardly bellyache about “a great big tax on jobs” when the carbon tax would be replacing the real “great big tax on jobs”.
At present payroll tax is a state tax. It was not always so. The McMahon Government gave it to the states. It was one of its sillier decisions (and it had a lot of competition).
The states then made a hash of it by having different rates and different thresholds. We now have eight payroll taxes – a costly embuggerance for national companies.
The Commonwealth could give the states the proceeds of the carbon tax in lieu of payroll tax, just as it does with the GST.
Over time, the revenue from the carbon tax should fall as people got more energy efficient. That would have the effect of lowering the overall tax take – again putting the lie to the “great big tax on everything” mantra.
The carbon tax would encourage people and companies to become more energy efficient; to invest in efficient-energy technologies which ultimately are cheaper.
This is roughly what happened in northern European countries when they introduced carbon-tax regimes 20 to 15 years ago. The result was higher employment, no loss of international competitiveness and more efficient, innovative industry.
Done well, a carbon tax can make economic sense on its own, irrespective of whether carbon is causing climate change or whether Australia should do anything about before the US, China and other major polluters.
CRISPIN HULL
This article first appeared in The Canberra Times on 4 June 2011.