Why cut a nearly undetectable tax?

Prepare for a price shock. Australia's inflation rate is out on Wednesday and the market is expecting 1.8 per cent. That's an annual rate of 1.8 per cent - a September quarter result so breathtakingly low it's close to the quarterly rate of 1.4 per cent for the previous September quarter.

Prepare for a price shock. Australia's inflation rate is out on Wednesday and the market is expecting 1.8 per cent. That's an annual rate of 1.8 per cent - a September quarter result so breathtakingly low it's close to the quarterly rate of 1.4 per cent for the previous September quarter.

The September quarters are the big ones. They are when electricity price rises hit the index. That one year on from the carbon tax a September quarter inflation result could be so low throws into an entirely different light Tony Abbott's claim that the price impact of the carbon tax would be "almost unimaginable".

"Almost undetectable" might be a better description. This month energy consultant Hugh Saddler of Pitt & Sherry told Fairfax Media it had been "almost impossible" to see the impact of the carbon price when it was introduced, and it would be no easier to see what happened if it was removed.

The Bureau of Statistics agreed. "The ABS is not able to quantify the impact of the introduction of carbon pricing, compensation or other government incentives and cannot produce estimates of price change exclusive of the carbon price," it said in a statement. "Similarly, the ABS will not be able to quantify the impact of removing the carbon price (if that were to occur)."

The near invisibility of the "great big new tax on everything" creates both political and administrative problems for Abbott. And a minefield for businesses.

The political problem is that it's hard to get the public outraged about a tax that is part of the furniture. Sure, there was a bump in energy prices when the tax came in in the September quarter 2012, but it's hard to tell how much of that was due to the tax and how much was due to the rapacious behaviour of the utilities we have been enduring for years. And the carbon tax bump is in the past (it won't be part of the annual inflation figure). The ongoing contribution of further adjustments to the carbon price is small by comparison.

The administrative problem is that it's hard to be sure you have removed what you can't see.

Abbott promised last week that if he axes the tax "Australian households will be better off to the tune of $550 a year".

The estimate derives from work done by the Treasury but it isn't the Treasury's. The department was asked in 2011 to predict the impact of a $23 a tonne emissions tax. It came up with $9.90 a week a household, about $515 a year. Abbott's team scaled that up for the increase in the carbon price from the middle of this year and the increase scheduled for the middle of next and came up with an impact of $550.

But, as best we can tell, the boost to prices from the carbon tax turned out to be lower than the Treasury forecast. That means any fall in prices resulting from axing the tax would also be lower, if suppliers act on the way down as they did on the way up.

(Environment Minister Greg Hunt's claim that the saving would be "$3000 per family over the next six years" is silly. It's hard enough to know what it would be for a year.)

There's an apparent acknowledgment in Hunt's draft repeal legislation that things aren't as straightforward as they seemed. During the campaign he promised that the Australian Competition and Consumer Commission would establish a unit to monitor and enforce reasonably expected price reductions following the abolition of the carbon tax.

It would ensure that "businesses pass on the benefits of lower input costs to consumers in the form of lower supermarket prices and lower prices for other goods and services".

The draft mentions by name only four types of goods, none of them sold in supermarkets. They are natural gas, electricity, synthetic greenhouse gas and synthetic greenhouse gas equipment. The minister would be able to specify other types of goods later, but the exclusion of supermarket goods - so prominent in the Coalition's advertising - suggests it is coming to the realisation that the tax pushed up their prices by so little that there's little point in making sure they are brought down.

Woolworths reports that its average food and liquor prices were 2.9 per cent lower in the financial year that followed the carbon tax. The Treasury had expected it to nudge up food prices by 80ยข a week.

The minefield for businesses caught up in the law is that if they engage in "price exploitation" by not cutting their prices by what the ACCC thinks is enough, they can be fined up to $1.1 million plus damages. Worse still, Abbott says the tax will vanish from July next year even if the legislation axing it isn't passed until later, after the new Senate meets that month. Not knowing what they are liable for and not knowing what they will have to pass on sits uneasily with a clause in the law gagging businesses from making "false or misleading representations about the effect of the carbon tax repeal".

If political positions weren't so entrenched Abbott and Hunt could just leave the tax in place. It's causing minimal damage, it's kicking goals (per capita household electricity and gas consumption is down 3 per cent) and it's an old tax. Google "old tax" and "good tax" and see what you find.

Twitter: @1petermartin

Ross Gittins is on leave.

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