The amazing disappearing carbon tax grab

Yesterday the cheques started rolling out to households as part of the household compensation package for the carbon price. And in July pay cheques will start hitting bank accounts with slightly less tax taken out of them.

While I was hoping the government would give all the compensation in quarterly cheques – which could not possibly be ignored – the government has chosen the economically and administratively wiser, but politically less effective, route of adjusting the existing tax and transfer system. 

I'm afraid people will go cash in the government's cheques they receive in May at the local Harvey Norman – making their electricity bills even worse – and forget all about them when the next electricity bill hits. Also they'll probably barely notice an extra 10 or 20 dollars in their back account each fortnight.

A few weeks ago I had a chat with my father-in-law who was absolutely convinced the only reason the government was introducing carbon trading was to raise taxation revenue.  I could sense the anger and resentment he felt that this government was in a desperate scramble for cash to patch-up financial waste and mismanagement. I believe he is representative of a large proportion of the Australian electorate that will be pivotal to who wins the next election, and it will be incredibly difficult for this perception of the carbon trading scheme to be dislodged.

Yet the amazing thing is this incredibly strong belief that the carbon trading scheme is just a tax grab has absolutely no basis.

The table below provides estimates of the total revenue and the total compensation/assistance associated with the introduction of the carbon pricing package.

Yes, the scheme has the potential to raise significant revenue of $27 billion. But you need to remember the government has already given the coal power stations a billion dollars in compensation before the scheme has even started. Then they'll give a further $2.054 billion in free permits to coal power stations, plus $9.2 billion free permits to trade exposed industry. This leaves them with almost $15 billion in revenue that they'll actually get their hands on.

Then the government will provide some considerable cash assistance to coal mines and steel mills, give small business a tax write-off and offer some further support, mainly to manufacturing, to help reduce the impact of the carbon price. This leaves the government with almost $13 billion. This amount completely disappears through tax cuts, pension increases etc. in compensation for households, leaving the government with a net deficit of nearly $2 billion.

Some tax grab.

Carbon pricing government revenue and offsetting compensation from 2011/12 to 2014/15

$millions

Source: Australian Government (2011) Securing a Clean Energy Future

Now of course you still get those who think this is all some kind of socialist-inspired mass income redistribution initiative. Well, the table at the bottom outlines in the first column the carbon pricing scheme compensating tax cuts for the 2012/13 budget for various income bands. Yes, those earning $80,000 or above only get a $3 tax cut whilst those below receive a cut of between $128 to $600 per annum.

But this should be put in perspective by considering the accumulated tax cuts received since 2008/09 while Labor has been in power. Anyone earning above $130,000 per annum has received more than $3000 per annum in tax cuts, and those earning above $180,000 have received tax cuts equalling $6000 per annum.

If you still think the carbon tax is some kind of socialist plot aimed at redistributing all the wealth to the poor let me give you a tip. There's this amazing tax avoidance scheme you can take advantage of. It will only require the investment of just one year's worth of the tax cuts that those on incomes of $130,000 have received since 2008/09, yet will enable you to completely offset the entire carbon tax.

It's called solar panels, solar hot water, energy-efficient light bulbs or insulation. 

Annual value of tax cuts by income band for 2012/13 and since 2008/09

Source: Australian Government Treasury (2012) Budget 2012/13 overview