04/07/2012 - 11:03

Two new taxes don’t equal reform

04/07/2012 - 11:03


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The carbon tax and the mining tax will create many issues, for government and business, but they are unlikely to live up to the fearmongering of their arch critics.

The carbon tax and the mining tax will create many issues, for government and business, but they are unlikely to live up to the fearmongering of their arch critics.

THE introduction this week of two new taxes marks the most significant shift in Australia’s tax system since the introduction of the goods and services tax (GST) more than a decade ago.

But don’t confuse these measures with ‘tax reform’. That term should only apply when a carefully considered package of measures is adopted.

One such package was the GST, designed as a replacement for a raft of less-efficient indirect taxes. It didn’t entirely meet that goal because so many goods and services were exempted, but it was a big step towards a better tax system.

The mining tax was born from the Henry tax review, which put forward an array of tax measures.

But the federal government picked just one – the ill-fated Resource Super Profits Tax. That idea was so unpopular it precipitated the downfall of former prime minister Kevin Rudd.

His successor Julia Gillard quickly negotiated a compromise with three big mining companies – BHP Billiton, Rio Tinto and Xstrata – to create what is now the Minerals Resource Rent Tax.

That deeply flawed process helps to explain why we have a deeply flawed tax. The MRRT has never been subject to normal, detailed scrutiny, because the government has never been truly open with the community.

The carbon tax is another measure born of compromise – in this case, a political compromise between Labor and the Greens.

The government tries hard to promote the carbon tax as tax reform. It’s more accurate to say the carbon tax is being introduced in tandem with a range of compensating tax cuts and government handouts, all designed to cushion the blow.

And that creates a contradiction at the heart of the carbon tax. It is meant to change behaviour. 

The whole point is to deliver a price signal that prompts people to change their consumption and investment patterns.

Yet the compensation negates the very price signals that are meant to encourage the consumption of less energy, the burning of less brown coal, the smelting of less aluminium, and so on.

The advocates of a carbon tax are, not surprisingly, reluctant to spell this out. The government is dreaming of a win-win, where we move to a cleaner economy but nobody suffers, no jobs are lost and no industries are shut down.

Equally unrealistic are the opposition’s alarmist claims about the damaging impact of the carbon tax.

It will raise about $8 billion in a full year, a significant impost but a small portion of Australia’s total tax take.

And it should be noted that, even with the carbon tax and the mining tax, Australia is still a relatively low taxing country.

Based on IMF figures, Australia’s total tax take is about 34.5 per cent of the economy. Of the 34 advanced economies, Australia ranks ninth, and half the countries with a lower tax take do not have a comprehensive welfare system.

Nonetheless, the $23/tonne carbon price is likely to push up electricity and other energy charges by about 10 per cent, and that is likely to flow right though the supply chain.

One of the major concerns with the carbon tax is that, while industries like coal-fired power generation will be compensated, trade-exposed industries will not be helped.

That creates a real risk that business may shift offshore to jurisdictions that do not tax carbon emissions.

A concern close to home is the hit to the liquefied natural gas industry; it is a big emitter, because the refining and liquefaction of gas is an energy intensive process, yet the industry exports a clean fuel that helps other countries reduce their emissions.

In other words, an efficient Australian export industry will be penalised even though the global benefit is a net positive.

That won’t change until other countries adopt similar measures, and progress on that front is slow.

The Gillard government is clearly wedded to the carbon tax but there are other measures it can adopt to ameliorate the impact.

APPEA reckons there are 230 or more other policies and programs regulating greenhouse gas emissions in Australia, and it wants to see them removed.

Reviewing those schemes would be a start on really useful reform.



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